OECD Releases Guidance on the Side-by-Side Package

On January 5, 2025, the OECD released guidance on the operation of the long awaiting Side-by-Side Tax Package (see: Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package).

The Side-by-Side Tax package consists of a number of simplifications, including:

-Simplified ETR Safe Harbour

-Extension of the Transitional CbCR Safe Harbour

-Substance-based Tax Incentive Safe Harbour

-Side-by-Side Safe Harbour

-UPE Safe Harbour

Simplified ETR Safe Harbour

This new Safe Harbour is a substantial element of the new Side-by-Side Guidance (of the total 88 pages, around 50 relate to this new Safe Harbour). 

This new Safe Harbour deems the top-up tax for a jurisdiction to be zero where the MNE group has Simplified ETR of at least 15%. The Simplified ETR is calculated as Simplified Taxes/ Simplified Income. There are, however, a lot of adjustments and exceptions that apply in the OECD Guidance.

In summary, both simplified taxes and income are generally based on the financial accounting numbers used to prepare the Consolidated Financial Statements, however, QDMTT jurisdictions that use a local financial accounting standard rule  (eg Hong Kong, Luxembourg, Poland) would generally use those accounting standards.

The Simplified income calculation is subject to a number of adjustments including the exclusion of dividends and equity gains and losses, industry adjustments and M&A simplifications.

Aside from this the standard GloBE elections also apply for the calculation of Simplified income.  The OECD Guidance also provides that GloBE adjustments for Asymmetric Foreign Exchange Currency Gains/Losses and Accrued Pension Expenses are required unless a five-year election is made not to include them. 

Simplified Taxes are based on the income tax expense in the financial accounts and includes deferred tax accounting (although DTLs subject to the GloBE recapture rules are not included).

In addition taxes pushed down to eg CFCs and hybrids are not included (unless a 5 year election is made). This doesn’t apply to domestic withholding tax on dividends, which is similar to the QDMTT provisions. 

Note that Simplified income and Simplified taxes can be calculated on a jurisdictional basis (as opposed to an entity basis).

The Simplified ETR will generally apply for financial years from December 31, 2026, however, it can apply from December 31, 2025 in certain cases (eg if the QDMTT Safe Harbour applied or only 1 jurisdiction had GloBE taxing rights for that jurisdiction). 

Extension of the Transitional CbCR Safe Harbour

This is to be extended for an additional year. 

Substance-based Tax Incentive (SBTI) Safe Harbour

This is a new Safe Harbour that deems the top-up tax for a jurisdiction to be zero insofar as it relates to ‘Qualified Tax Incentives’ (QTIs).

The Top-up Tax that relates to QTIs is the difference between:

(i) the Top-up Tax for the jurisdiction calculated with the amount of QTIs used in the year being added to covered taxes (subject to a cap), and

(ii) the Top-up Tax if the SBTI Safe Harbour election hadn’t been made.

A QTI is defined as a generally available tax incentive calculated based on expenditure incurred, or on the amount of tangible property produced in the jurisdiction. 

The SBTI Safe Harbour is to apply from fiscal years beginning from January 1, 2026.

Side-by-Side (SbS) Safe Harbour

The SbS Safe Harbour excludes an MNE group from the IIR and UTPR (not QDMTT) where its UPE is located in a qualifying SbS jurisdiction. A qualifying SbS jurisdiction is a jurisdiction that has an eligible domestic tax regime and an eligible worldwide tax regime (generally required to be in place before January 1, 2026) as well as providing a FTC for QDMTTs.

Various conditions are required to be met for a tax system to qualify as an eligible domestic tax system or an eligible worldwide tax regime (eg for an eligible domestic system its statutory nominal CIT rate is at least 20%), however in both cases there must not be a material risk that the GloBE ETR would be below 15%. 

Whether a jurisdiction qualifies as a qualifying SbS regime will be determined by the OECD and the jurisdiction will be included in the Central Record (similar to how DMTTs that qualify as QDMTTs etc are).  To date only the USA is recognised by the OECD as a qualifying SbS regime.

The SbS Safe Harbour will apply for Fiscal Years from January 1, 2026.

UPE Safe Harbour

The UPE Safe Harbour is similar to the SbS Safe Harbour but only applies to exclude an MNE group from the UTPR on profits located in the UPE jurisdiction. However to qualify a jurisdiction only needs to have an eligible domestic tax regime (not an eligible worldwide tax regime as required for the SbS Safe Harbour).

As with the SbS Safe Harbour, Qualified UPE Regimes will be listed in the OECD Central Record and this Safe Harbour will apply from  January 1, 2026.

Domestic Enactment

Note that in order for these rules to be applicable domestically they need to be enacted into domestic law by relevant jurisdictions. Even with jurisdictions that transpose the OECD Model Rules and Guidance into their domestic law (and don’t redraft the OECD model rules/guidance domestically) they typically apply the transposition to specified OECD publications. As such, the transposition law would still need to be amended to include this latest tranche of OECD Guidance.