OECD presents ‘side-by-side’ Pillar 2 deal as a stabilising compromise for the global minimum tax, critics argue it does the opposite

The OECD is presenting its new “side-by-side” arrangement under Pillar 2 as a stabilising compromise for the global minimum tax. However, its critics argue it does the opposite — carving out powerful multinationals, weakening tax sovereignty, and locking in billions in lost revenue, while shifting the real momentum on global tax reform away from Paris and toward the UN.

The OECD announced, on 5 January 2026, that the 147 countries and jurisdictions working together within the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS have agreed on the key elements of a side-by-side arrangement, including, among other features, two safe harbours applicable to MNE groups headquartered in jurisdictions recognised by the Inclusive Framework as having an eligible tax regime.

Following months of intense negotiations, the comprehensive package for a “side by side” arrangement represents a significant political and technical agreement which will set the foundation for stability and certainty in the international tax system. It will preserve the gains achieved so far in the global minimum tax framework and protect the ability for all jurisdictions, particularly developing countries, to have first taxing rights over income generated in their jurisdictions.

The package includes five key components:

• First, a series of simplification measures will reduce compliance burdens for multinational enterprises (MNEs) and tax authorities in calculating and reporting under the global minimum tax rules.
• Second, the package further aligns the treatment of tax incentives globally through the introduction of a new targeted substance-based tax incentive safe harbour.
• Third, new safe harbours are available to MNE Groups having an ultimate parent entity located in an eligible jurisdiction which meets minimum taxation requirements.
• Fourth, the package includes an evidence-based stocktake process to ensure a level playing field is maintained for all Inclusive Framework Members.
• Fifth, the package reinforces the objective that qualified domestic minimum top-up tax regimes remain a primary mechanism in the global minimum tax framework for ensuring the protection of local tax bases, particularly in developing countries.

Side-by-Side Arrangement

While the Inclusive Framework considers that the adoption of a co-ordinated GMT, based on a common approach, should be the primary system for ensuring minimum taxation, the Inclusive Framework also recognises that some jurisdictions may already have implemented a tax regime which incorporates minimum taxation requirements with respect to the domestic and foreign income of MNE Groups headquartered in that jurisdiction. Where such tax regimes have and maintain similar policy objectives, overlapping scope, and a complementary policy impact as the GMT; taking into account the success of qualified domestic minimum top up taxes (QDMTTs), and based on the commitment of members to address any BEPS or level playing field risks arising from the GMT and its interplay with the SbS System, the Inclusive Framework has agreed to the SbS and UPE Safe Harbours that apply to MNE Groups headquartered in jurisdictions which the Inclusive Framework has determined meet the requirements for an eligible tax regime.

The SbS Safe Harbour will only be available to an MNE Group that has its UPE located in a jurisdiction which has both an eligible domestic tax regime and an eligible worldwide tax regime. These tax regimes will only be eligible if they effectively achieve a minimum level of taxation of MNE Groups’ domestic and foreign operations. When it elects for the safe harbour, an MNE Group will not be subject to the IIR or UTPR.

Within this context, the Inclusive Framework also agreed a safe harbour for jurisdictions with regimes that only meet the domestic part of the eligibility criteria. The UPE Safe Harbour will provide a safe harbour with respect to the domestic profits of MNE Groups headquartered in jurisdictions which have a pre-existing eligible domestic tax regime. When it elects for the safe harbour, an MNE Group will not be subject to the UTPR in respect of the profits located in the UPE jurisdiction.

Where the Inclusive Framework has determined that a jurisdiction has a Qualified SbS or UPE Regime, that jurisdiction shall be listed as such on the Central Record.

Upon request by a member jurisdiction, the Inclusive Framework will assess that jurisdiction’s preexisting tax regimes against the eligibility criteria for a Qualified SbS or UPE Regime by the end of the first half of 2026. The Inclusive Framework will assess the eligibility as a Qualified SbS Jurisdiction of any other IF jurisdiction once that jurisdiction initiates such a request to the Inclusive Framework in 2027 or 2028. The assessment of that jurisdiction’s eligibility will be undertaken in a timely manner and on the same basis outlined above and taking into account that the Inclusive Framework considers that the adoption of a coordinated GMT, based on a common approach for ensuring minimum taxation (particularly through the implementation of QDMTTs) is critically important and should be the primary system. The timing of any access to the SbS Safe Harbour will take into consideration when the legislation entered into effect and the time necessary to review the eligibility of a regime as well as any information gathered as part of the stocktake.

All MNE Groups (including those eligible for the SbS or UPE Safe Harbours) remain subject to the QDMTT in all QDMTT jurisdictions in which they operate. In all QDMTT jurisdictions, the QDMTT for all MNE Groups must continue to be calculated without the pushdown of taxes on controlled foreign companies or foreign branches.

OECD’s Pillar 2 retreat hands tax power to the US

Critics of the “side-by-side system” — effectively exempting the US multinationals from the core of Pillar 2 — say that it is being sold as pragmatic diplomacy. In reality, it looks more like surrender.

As Alex Cobham of the Tax Justice Network bluntly put it, OECD members have “forfeited… their sovereign right to tax businesses operating within their own borders,” an outcome he calls “an alarming subjugation of state sovereignty.”

The financial stakes are not abstract. According to Tax Justice Network estimates, France already loses around USD 14 billion a year to tax abuse by US firms, Germany USD 16 billion, and the UK USD 9 billion. Exempting the world’s most powerful multinationals from global minimum tax rules does not stop those losses — it entrenches them. And yet, as Cobham notes, “the OECD… [has] not put a number on the scale of tax losses that will result.” For an organisation built on evidence-based policymaking, that silence is telling.

Equally troubling is how the decision was reached.

The OECD claims “consensus,” but offers no transparency on who supported or opposed the carve-out. There are no published voting rules, no records, and no accountability. As Cobham argues, this opacity amounts to “a complete dereliction of the organisation’s duty.”

The US participates in negotiations, pushes to water down reforms, and ultimately sidesteps them — after others have delayed or weakened alternative solutions. Meanwhile, the scale of the problem grows. US multinationals now shift twice as much profit out of other countries as they did in 2016, accounting for nearly a third of global corporate tax abuse.

Ironically, Americans themselves are among the biggest losers. “This great victory for Trump will cost his own people the most,” Cobham notes, underscoring that aggressive profit shifting hollows out public finances everywhere, including in the US.

The UN offers a different path

Non-OECD countries saw this coming. That is why tax negotiations moved to the United Nations, where progress in one year has arguably exceeded a decade at the OECD. The UN talks are challenging the century-old foundation of international tax rules — what Cobham calls

“Rule 1”: tax companies where they declare profits.

That “pay-where-you-say” system no longer fits a world of mobile profits and intangible assets. Its replacement, a “pay-where-you-play” approach — taxing multinationals where they employ workers and sell goods — could make tax havens “obsolete overnight” and help recover an estimated USD 348 billion lost globally each year.

While the OECD frames the US carve-out as a breakthrough, the UN process is quietly attempting something more ambitious: restoring fairness, sovereignty, and credibility to global tax rules. For governments that have just given up revenue — and a measure of self-respect — that may be the last real chance to take it back.