Pillar Two Reporting - the New "Side-by-Side" Framework

On 5 January 2026, the OECD released its Side-by-Side (SbS) Package, an 88-page set of additional safe harbours and concessions intended to operate alongside the existing Pillar Two global minimum tax rules. While these measures are designed to streamline compliance, they add another layer to an already extensive and complex regime.

Although Australia is expected to adopt elements of the SbS framework, the new rules will not apply to Australian taxpayers unless and until enacted into domestic law.

SbS Safe Harbour

The SbS Package introduces a new safe harbour that provides an exemption from Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) top-up taxes where the Ultimate Parent Entity (UPE) is resident in a jurisdiction operating a “Qualified SbS Regime” (read here “the United States”).

A brief chronology of US–OECD interaction on Pillar Two is helpful context:

• 2017 – The United States introduces the GILTI regime

• 2021 – The OECD launches Pillar Two, at the time with US support

• January 2025 – The United States rejects Pillar Two implementation and signals potential retaliatory measures

• June 2025 – G7 leaders agree that US-headed groups may be excluded from Pillar Two

• January 2026 – The OECD releases the SbS Package

Importantly, this safe harbour does not restrict the application of a qualified domestic minimum top-up tax in other jurisdictions.

The SbS Safe Harbour is proposed to apply to financial years beginning on or after 1 January 2026, subject to domestic implementation in Australia. Earlier periods remain governed by the existing Pillar Two rules, and exemption from tax exposure does not equate to exemption from reporting obligations.

UPE Safe Harbour

The SbS package also proposes a new UPE Safe Harbour. While no jurisdiction currently qualifies, the framework would allow certain UTPR calculations to disregard entities located in an eligible jurisdiction where the UPE is also located there.

As with the SbS Safe Harbour, this measure is proposed to apply for financial years beginning on or after 1 January 2026, subject to implementation in Australia.

Extension of Transitional CbC Reporting Safe Harbour

The existing Transitional Country-by-Country (CbC) Reporting Safe Harbour is proposed to be extended by one year. It would now apply to fiscal years beginning on or before 31 December 2027 and ending by 30 June 2029.

Simplified Effective Tax Rate (ETR) Safe Harbour

The SbS package refines and extends the simplified ETR concept included in the Transitional CbC Safe Harbour. Under the new framework, no top-up tax will arise where the Simplified ETR is at least 15%.

Importantly, compared to the Transitional CbC Safe Harbour:

• the phase-out period of the transitional regime is removed

• the continuous eligibility requirement is also removed

The Simplified ETR Safe Harbour is expected to apply for financial years beginning on or after 31 December 2026 (potentially 2025), again subject to Australian adoption.

Substance-Based Tax Incentive Safe Harbour

The package also proposes a substance-based tax incentive safe harbour. This allows taxpayers, by election, to neutralise the impact of certain production-based or expenditure-based incentives that would otherwise increase top-up tax under Pillar Two and effectively reverse their effect.

This measure is proposed to be effective for financial years beginning on or after 1 January 2026, subject to Australian legislative action.

Supporting Multinational Groups

We assist large multinational enterprise (MNE) groups with their Australian Pillar Two compliance and Country-by-Country reporting obligations, including assessment of eligibility for the new safe harbours.

Please contact us if you would like to discuss how these developments may affect your group.

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