Pillar 2: new side-by-side deal and Safe Harbours announced

After a period of uncertainty and long negotiations among the OECD/G20 members about the future and application of Pillar 2 rules, in particular its backstop mechanism (known as UTPR), an agreement was found and published this January.

New side-by-side package

While Pillar 2 rules came into effect for accounting periods commencing on or after 31 December 2023, uncertainty surrounded the future of the rules in a context where the US had not adopted Pillar 2. On 20 January 2025, an executive order was issued by the White House, announcing that jurisdictions applying the backstop mechanism to US Companies could suffer retaliations. This backstop mechanism is essential for the integrity of the rules and prompted negotiations to find an acceptable compromise. 

The OECD/G20 member States have now agreed on a “side-by-side” (SbS) package introducing new safe harbours. The new provisions are designed to reduce compliance burdens for jurisdictions that already impose a minimum level of taxation on domestic and foreign income of Multinational Enterprises (MNE) groups headquartered in their borders.

For instance, these measures recognise that the U.S. domestic minimum tax rules (GILTI) offset Pillar 2 obligations and provide an exemption to U.S.-based multinationals from top-up taxes under the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) when certain conditions are met.

New Safe Harbours

• SbS Safe Harbour – applies to jurisdictions that have both an eligible domestic tax system and a worldwide tax system. When a group elects for this safe harbour, no constituent entities of the MNE will be subject to IIR or UTPR.
• Ultimate Parent Entity (UPE) Safe Harbour – applies where a jurisdiction only has an eligible domestic tax system. When a group elects for this safe harbour, the MNE group will not be subject to UTPR for entities based in the UPE jurisdiction.

When a filing Constituent Entity elects the SbS or UPE Safe Harbour, the top-up tax for a jurisdiction is deemed to be zero for purposes of the IIR and UTPR, or UTPR only, respectively. This treatment extends to Constituent Entities that are determined to be stateless entities or minority-owned constituent entities of the MNE Group.

All MNE Groups remain subject to Qualified Domestic Minimum Top-Up Taxes (QDMTT) in all applicable jurisdictions, regardless of the new safe harbours.

The OECD’s Inclusive Framework will determine if a jurisdiction’s tax system is a qualifying SbS or UPE regime, based on criteria specific for each safe harbour, and publish the list of jurisdictions which qualify.

Timeline

The new safe harbours apply to fiscal years beginning on or after 1 January 2026, with the UTPR Safe Harbour remaining in place for periods commencing in 2025. Therefore, MNE Groups may still need to compute the applicable IIR and UTPR top-up tax liability for FY24 and FY25. Moreover, while the new safe harbours offer meaningful simplification in applying the GloBE Rules, in‑scope MNE Groups should carefully assess the composition of their group (including confirming the appropriate UPE and Constituent Entities) before applying them to ensure efficiencies in GloBE Information Return (GIR) compliance. Further clarifications are expected from the OECD on the integration of the new safe harbours within the GIR.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Forvis Mazars corporate tax team below: