On 5th January 2026, the OECD published their much anticipated “side-by-side” agreement. The document, totalling 88-pages, aimed to calm the political waters between the OECD and the once proposed, but now removed, section 889 in Trump’s “one big, beautiful bill” which threatened to stop the entire Pillar Two mandate dead in its tracks.
The initial aim of the side-by-side (“SbS”) agreement was to exempt US HQed multinationals over the threshold limit (€750m annual revenue) from as much of the additional tax and reporting burden as possible. Two parts of Pillar Two – the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) – would effectively repatriate US taxes to other jurisdictions given the US’s position on Pillar Two; something the American administration saw as unfair in light of their existing profit-shifting measures (Net CFC Tested Income and CAMT).
What has been agreed is that jurisdictions with qualifying domestic regimes, as determined in the “Qualifying SbS Regimes” section of the OECD “Central Record for purposes of the GMT”1, effectively are removed from part of the Pillar Two requirements. Naturally, the US is the first such jurisdiction, but the door is now open for other jurisdictions to apply.
Were there any extensions to deadlines?
In short, no.
However, there was a one-year extension of the transitional country-by-country reporting (CbCR) regime, with the added clarification that the simplified Effective Tax Rate (ETR) test within that regime will be based on the same 17% rate threshold as applicable to the last of the three years (2026). This isn’t groundbreaking but does provide a little respite for groups operating in jurisdictions where their ETR is “close to the wire”. The specific calculations will therefore be the same as the ones executed for 2026 (obviously taking into account any “exits” from the transitional safe harbour regime which enforces a “once out always out” approach).
What happens in the first half of 2026?
In short, nothing.
The SbS changes apply for accounting periods starting on or after 1 January 2026. As we know, Pillar Two has been in place for accounting periods from FY24, and as such, all work that businesses in scope are doing to prepare now for the 30 June 2026 deadline is not wasted. Or to put it another way, the push to comply by mid-2026 hasn’t changed. Local and group filings are still required as they were before, including XML (and other) filings to regulators as well as the GloBE Information Return (GIR).
What are the big changes to what is being reported?
The agreement means that any jurisdiction with a “qualifying side-by-side regime” (QSbSR – when will the acronyms end?!) can elect for the new safe harbour and are effectively:
- Exempt from applying IIR or UTPR to any overseas subsidiaries.
- Are able to submit a “simplified” GIR via XML. As of yet, we don’t know what that looks like. The OECD states that they are aiming to complete this work in the first half of 2026, ahead of when compliance under the new templates will be required.
- Still need to abide by the Qualified Domestic Minimum Top-Up Tax (QDMTT) sections of Pillar Two and submit local filings where relevant.
So, for those groups affected, the reporting requirement certainly lessens, but also changes, and does not reduce to near-zero (as some commentators had been pushing for).
What this means in a practical sense is that once the simplified GIR is published (by the middle of 2026), some work may be required to map datapoints to the new format. However, if the simplified format is a sub-set of the values included in the full GIR, which will be reported in 2026 in any case, then it should be a straight-forward exercise; or, indeed, your Pillar Two software should handle the transition automatically.
What are the big changes to what you need to calculate?
Businesses in scope will be well used to the “CbCR temporary safe harbour”, and indeed those will continue to apply in the near term. However, from periods commencing on or after 31 December 2026 (though local jurisdictions have the option to apply to periods a year earlier, from 31 December 2025), a new permanent safe harbour will replace these measures.
The first of these new tests, the Simplified ETR safe harbour is more aligned to financial statements, with detailed adjustments and elections, with two additional safe harbours currently being discussed for release in H1 2026. In short, the new tests are more technical than the current iteration, so there will be another round of data assessment, mapping, and calculation for businesses. Thankfully this won’t be until the second half of 2026, but still, more work to be done!
Are there any hidden “gotchas”?
The new guidance on the simplified ETR permanent safe harbour represents a clear break from the CbCR-based regime. Notably, it abandons the “once out, always out” principle and instead allows groups to move in and out of the safe harbour on a jurisdiction-by-jurisdiction basis, subject to conditions for re-entry.
This flexibility, however, creates potential complexity where a jurisdiction fails the ETR test and re-enters full GloBE computations, as groups may need to retrospectively reconstruct data from prior safe harbour years under the main rules, including deferred tax accruals and reversals. The Inclusive Framework has acknowledged this issue and has indicated that further guidance will be issued to manage this transition while preserving the intended simplifications of the safe harbour years.
Whilst not a ‘gotcha’ as such, just like previous rounds of Pillar Two legislation, these updates will need transposing into local law. Given the reach and complexity of the latest package, discrepancies and deviations are to be expected. One to monitor.
What does this mean for systems and technology?
We know that provisioning has been a cornerstone of Pillar Two calculations from the outset. These changes only increase that bond. The simplified ETR permanent safe harbour will rely more on deferred tax accounting than its predecessor under the transitional CbCR regime, and as such businesses will see yet more reason to move their provisioning away from Excel into a robust software solution.
Outside of provisioning, it is clear that businesses can expect a continual change to the calculations that are required of them over the coming years. Indeed, the OECD document tells us that there will be a further review of the side-by-side safe harbours in 2029 – by which time a full US election cycle will have taken place. What this means in practice is that we can’t expect Pillar Two to “stand still” over the next five years, at least. Customers aiming to use Excel to meet the requirements (aside from XML filings) can expect a bumpy road of annual changes and associated advisory fees.
Overall, we all knew that Pillar Two was complex. These new requirements add another layer of complexity on top and whilst for some it will mean (in time) that they report fewer figures to their relevant authorities, there is no escaping the number of calculations needed, and data required to carry them out.
What should businesses do next
We are seeing customers fall into two broad buckets; outsourced compliance and insourced. For those who are planning on fully or partially outsourcing – talk to your chosen provider. Sadly, this also likely means additional fees. Budget for these fees in 2026 and beyond to ensure that you won’t be hit by nasty surprises.
For those insourcing Pillar Two – talk to your software provider. Check that they’re incorporating the required changes in their software, and when, and make sure that you are well “ahead of the curve” if possible. If the solution involves customised data mapping, expect to update that to meet requirements.
Finally, we know that businesses are going “all guns blazing” for the first major deadline at the end of June 2026. Organisations readiness for Pillar Two still vary wildly from being 100% ready to nowhere near it, as well as everything in between. But wherever you are on that journey, just be aware there are yet more changes coming – thankfully there are people out there who can help you along the way.