The Side-by-Side Package and the fate of the Global Minimum Tax

The OECD's release of the "Side-by-Side Package" on 5 January 2026 marks a watershed moment for the Global Minimum Tax (GMT). After months of painstaking multilateral negotiations, which likely affected the Christmas holidays of many, the Inclusive Framework has delivered a set of measures that substantially recalibrates the GMT architecture.

The package is, first and foremost, a response to U.S. concerns. U.S.-headquartered MNE Groups will be shielded from the Income Inclusion Rule and the Undertaxed Profit Rule for fiscal years beginning on or after 1 January 2026. The quid pro quo? A renewed multilateral commitment to the priority of QDMTTs and the safeguard of IIRs on U.S. based intermediate parent entities of groups headquartered in a Pillar 2 jurisdiction. As part of the package, the permanent ETR safe harbour, the extension of the temporary CbCR safe harbour, a new approach on the treatment of tax incentives, and a stocktake exercise by 2029.

In September 2025, in the wake of the G7 statement of 28 June 2025, we underlined 6 key technical issues that in our view would define the fate of the GMT:

1.     What is a “U.S. parented group”?  The Side-by-Side Package provides that the Side-by-Side Safe Harbour applies only to groups with a UPE located in a qualified side-by-side jurisdiction. Where an MNE Group has its UPE located in a jurisdiction without a Qualified Side-by-Side Regime, both the IIR and the UTPR apply to all of its operations, irrespective of whether such MNE Group has constituent entities other than the UPE (including intermediate parent entities) located in jurisdictions that have a Qualified Side-by-Side Regime.

2.     How to introduce the exclusion for “U.S. parented groups”? The Package provides that, upon request by a member jurisdiction, the Inclusive Framework will assess a jurisdiction’s pre-existing tax regime against the eligibility criteria for a Qualified Side-by-Side Regime or a Qualified UPE Regime. It was unclear whether the safe harbour would be limited to the U.S. or based on a set of criteria which, if satisfied by a jurisdiction, would render the safe harbour applicable.

3.     What will be the destiny of the UTPR?  The introduction of the Side-by-Side Safe Harbour and the UPE Safe Harbour - under which the UTPR backstop does not apply to the profits of MNE groups in a UPE qualified jurisdiction - has materially weakened the UTPR underlying premise. The UTPR was conceived as the ultimate backstop, ensuring that low-tax outcomes would be neutralised even where neither the Income Inclusion Rule nor a domestic minimum tax applied.

4.     What will be the impact on Domestic Minimum Top-Up Taxes (DMTTs)? The Package confirms the architecture of DMTTs, including the continued exclusion of any push-down of CFC taxes into a DMTT and the primacy of QDMTTs over the Income Inclusion Rule. This reinforces the central role assigned to domestic minimum taxes within the GloBE hierarchy, as also underlined by the Inclusive Framework’s commitment to undertake additional work to ensure that conditional ones are not recognised as Covered Taxes.

5.     Which Tax Credits will be safeguarded?  The Package provides that expenditure-based and production-based tax incentives may be treated as Qualified Tax Incentives, with the consequence that any top-up tax attributable to these incentives will be deemed to be zero.

6.     Operational and other issues: One of the questions that arose following the G7 deal was whether the new rules would apply from 2024, from 2025, or from 2026 onward. The Package provides that the new safe harbours do not apply to fiscal years commencing before 1 January 2026, namely tax periods 2024 and 2025, for which the ordinary GloBE rules and the temporary Safe Harbours continue to apply unchanged. The Side-by-Side Safe Harbour and the UPE Safe Harbour are applicable for fiscal years commencing on or after 1 January 2026, or a later year as listed in the Central Record. Similarly, the Substance-Based Tax Incentives Safe Harbour and the Simplified ETR Safe Harbour apply for fiscal years commencing on or after 1 January 2026 (the latter with an option for jurisdictions to apply it from 31 December 2025 under certain conditions).

But let’s dig in.

The New Safe Harbour Architecture

The Side-by-Side Safe Harbour operates where an ultimate parent entity is located in a jurisdiction which: (i) has an "eligible domestic tax system"; (ii) has an "eligible worldwide tax system”; (iii) provides a foreign tax credit for QDMTTs on the same terms as other creditable covered taxes; and (iv) enacted those regimes by 1 January 2026 (or a later date per specified procedures).

An "eligible domestic tax system" requires

a)     at least a 20% statutory nominal CIT rate after preferential and sub-national adjustments,

b)     a QDMTT or a corporate alternative minimum tax based on financial statement income with a nominal rate of at least 15% applicable to a substantial portion of in-scope MNE income, and

c)     no material risk that in-scope UPE-headquartered MNEs will face an effective rate on domestic profits below 15%.

An "eligible worldwide tax system” requires the existence of a comprehensive regime which

(a)    taxes all resident corporations on foreign income, covering both active and passive income from branches and CFCs whether distributed or not, save for limited exclusions consistent with minimum tax policy,

(b)   incorporates substantial unilateral BEPS risk mitigation, and

(c)    presents no material risk that in-scope MNEs will face an effective tax rate on foreign profits below 15% after factoring in incentives aligned with GloBE treatment.

Alongside sits the permanent UPE Safe Harbour, replacing the transitional UTPR safe harbour as from fiscal years starting on or after 1 January 2026. For jurisdictions with an "eligible domestic tax system" this shields domestic profits in qualifying jurisdictions from UTPR exposure.

Crucially, QDMTTs remain unaffected. They continue to apply, including in relation to the foreign operations of MNE Groups headquartered in a jurisdiction with a Qualified Side-by-Side Regime or a Qualified UPE Regime. QDMTTs take priority over (i.e., will be calculated without taking into account) CFC taxes imposed on foreign permanent establishments or controlled foreign companies by other jurisdictions. Any QDMTT will be creditable under the GMT and under any Qualified Side-by-Side Regime or Qualified UPE Regime.

The  multilateral bet appears to be on widespread QDMTT adoption to maintain a level playing field. But this has to be squared with the new rules on tax incentives.

Substance-Based Tax Incentives: A Policy Pivot

Perhaps the most significant policy development is the Substance-Based Tax Incentives Safe Harbour. It represents a fundamental departure from the previous (largely accounting-based) treatment of tax incentives with the relatively more favorable tax treatment of qualified refundable tax credits, later extended to marketable transferable tax credits. Starting from fiscal years beginning on or after 1 January 2026, the newly introduced Substance-Based Tax Incentives Safe Harbour allows MNEs to elect to treat certain tax incentives as Qualified Tax Incentives (QTIs). QTIs are treated as additions to Covered Taxes for purposes of the effective tax rate calculation, with the consequence that any top-up tax attributable to the incentive is deemed to be zero. Unlike QRTCs and MTTCs, QTIs are not included in GloBE Income, making their classification more favorable from an ETR perspective.

QTIs are either:

• expenditure-based, i.e. tax benefits that are directly linked to qualifying expenditures already incurred by the taxpayer, such as research and development costs, employment-related expenses, or capital investments; these incentives must be computed by reference to actual costs and may not exceed the amount of the underlying expenditure; or 

• production-based, i.e. tax benefits that are calculated on the basis of the quantity of production or the reduction of industrial byproducts attributable to production activities carried out within the jurisdiction. To qualify, such incentives must be determined by reference to production volume rather than value, must relate to the production of tangible property - including activities such as manufacturing, electricity generation, extraction, and refining - and must be grounded in units of production generated locally.

Most importantly, the safe harbour is subject to a so-called substance cap, under which the annual amount of QTIs that may be recognized is capped at the higher of 5.5% of eligible payroll costs or depreciation of tangible assets in the jurisdiction, or alternatively at 1% of the carrying value of tangible assets where the MNE makes a five-year election.

The Simplified ETR Safe Harbour

Under the permanent Simplified ETR Safe Harbour, if a tested jurisdiction has a Simplified ETR of at least 15% (or a simplified loss), an MNE group may elect to treat the top-up tax as zero for that year. The Simplified ETR is calculated using jurisdictional reporting package data, based on simplified income and simplified taxes, adjusted through a mix of mandatory and elective rules. Separate calculations apply to joint ventures, minority-owned entities, and sub-groups.

Simplified income starts from jurisdictional profit before tax and is adjusted to exclude qualifying dividends and equity gains, add back disallowed expenses (including significant fines and penalties), apply sector-specific rules (e.g. financial services and shipping), and address equity-accounted items. Simplifications similar to those under the Transitional CbCR Safe Harbour also apply to mergers and acquisitions.

Simplified taxes are derived from current and deferred tax expenses, with numerous adjustments. These include excluding non-covered taxes, taxes linked to excluded income, uncertain tax positions, and current taxes not expected to be paid within three years. Deferred tax is subject to multiple simplifications, such as recalculation at the 15% rate, simplified loss treatment, and the disregard of valuation allowances. Taxpayers may also elect specific treatments for refundable and transferable tax credits, as well as a new substance-based tax incentive safe harbor.

The safe harbour further includes:

• simplified transfer pricing rules, including reliance on arm’s-length pricing in local returns;

• a streamlined approach to allocating cross-border income and taxes, broadly aligned with QDMTTs, with optional elections for permanent establishments and certain non-QDMTT jurisdictions;

• targeted rules for tax-neutral UPEs, transparent and stateless entities, and investment entities; and

• integrity provisions requiring further adjustments where necessary to ensure outcomes consistent with four core principles: matching intragroup income and expenses; full allocation of income to a tested jurisdiction; prevention of multiple deductions of the same expenses or losses; and the recognition of tax amounts only once and in a single jurisdiction.

Eligibility is assessed annually, and re-entry after losing safe harbor status generally requires two years without a top-up tax, potentially satisfied through other safe harbors.

Bottom line: while the Simplified ETR Safe Harbour aims to reduce compliance burdens post-transition, the number of mandatory and elective adjustments required suggests this is less a simplification and more an alternative computational framework designed to address practical challenges rather than provide genuine compliance relief. The extension of the Transitional CbCR Safe Harbour for an additional year, with a 17% ETR threshold for 2026 and 2027, provides breathing room. But the trajectory is set.

Stocktaking

The Inclusive Framework has committed to evidence-based analysis of the combined operation of the global minimum tax and the Side-by-Side system, with corrective action where substantial risks are identified. This signals genuine concern about potential competitive distortions between MNEs subject to GloBE Rules, including QDMTTs, and those operating in jurisdictions without them. The stocktaking exercise by 2029 deserves attention.

What Lies Ahead

It will be important to monitor whether and which other jurisdictions will have qualifying domestic and/or worldwide tax systems and how these regimes will be assessed by the Inclusive Framework. The United States is currently the only jurisdiction listed on the OECD's central record as having a "Qualified Side-by-Side Regime". Other major economies—China, India and Brazil come to mind—may well seek assessment against these criteria.

This triggers the question about the fate, and shape, of the GMT.

It increasingly resembles a coordinated CFC regime designed in alignment with domestic minimum taxes. In this context, the multilateral wager has effectively shifted away from the UTPR and towards the widespread adoption of QDMTTs, which are now expected to carry much of the burden of preserving a level playing field across jurisdictions.

What remains less clear is whether jurisdictions will ultimately reconsider the desirability - or political feasibility - of adopting a domestic minimum tax in the first place. Following the introduction of the Side-by-Side and UPE Safe Harbours, the incentives for individual jurisdictions to opt in become more nuanced and potentially less compelling. In this respect, a key variable will be the effectiveness of the newly introduced substance-based incentives safe harbour.

The significant shift in the interaction between tax incentives and the GMT is in fact likely to influence the design of incentive regimes across jurisdictions. As predicted, the new substance-based safe harbour closely mirrors the criteria used for the Substance-Based Income Exclusion, relying on tangible assets and employees to determine a jurisdictional substance cap. As a result, the safe harbour is likely to have a more pronounced impact in economies where investment models are characterized by high levels of employees and fixed-assets, while offering more limited protection in other jurisdictions.

Local and group-level filing obligations under the GloBE rules remain largely unchanged. However, a key simplification has been introduced for MNE Groups operating within a Qualifying Side-by-Side Regime, which will be permitted to submit a “simplified” GIR, expected to require less granular data reporting compared to the standard GIR. The OECD anticipates that the XML schema for this simplified GIR will be available in the first half of 2026.

Closing on the substantial legal issues surrounding the entire exercise, the debate has already sparked in relation to the implementation of the package, particularly within the EU. The European Commission’s notice of 12 January confirms that Member States may apply the new safe harbours under Article 32 of the Minimum Tax Directive. Whether it is sufficient remains an open question. In any case, amendments to domestic laws implementing the Directive may well have public finance effects. Moreover, there may be additional difficulties in bringing the Substance-Based Tax Incentives Safe Harbor within the scope of Article 32, given that such a safe harbor may not result in the Top-up Tax due by a group in a jurisdiction being deemed to be zero, although arguably the same applies for the existing UTPR Safe Harbour.