By Joe Sothcott, Young Jin Kim & Annamaria Maclean

 

2025 marked the first year multinational enterprise (MNE) groups became subject to the OECD’s Global Anti‑Base Erosion (GloBE) Pillar Two rules in New Zealand. These OECD coordinated rules are intended to ensure that MNE groups pay a minimum effective tax rate of 15 percent on their income in each jurisdiction in which they operate.

However, the global implementation of Pillar Two has faced a number of challenges. In particular, the future of the GloBE rules was brought into question when the United States proposed to introduce section 899 under the One Big Beautiful Bill which could have imposed increased taxes on “discriminatory foreign countries”.  New Zealand was considered to be a discriminatory foreign country at the time as it had implemented certain aspects of the Pillar Two framework.

Before section 899 was formally enacted, an agreement was reached between the United States and its G7 partners to remove the provision from the legislation. In return, the United States secured an in principle exemption for US‑headquartered MNE groups from the Pillar Two rules (see our August 2025 Tax Alert article).

Following further negotiations, on 5 January 2026 the OECD released the long‑awaited GloBE Side‑by‑Side Package (SbS Package). The SbS Package gives effect to this agreement and introduces a range of additional amendments to the Pillar Two rules.

What is included in the SbS Package?

The SbS Package is not just a side-by-side system but includes additional new or extended safe harbours. The SbS Package comprises:


Simplified Effective Tax Rate Safe Harbour
Extension of the Transitional Country-by-Country Reporting Safe Harbour
Substance-based Tax Incentive Safe Harbour
Side-by-Side System, consisting of the Side-by-Side Safe Harbour and the Ultimate Parent Entity Safe Harbour

Permanent Simplified Effective Tax Rate Safe Harbour

The SbS Package introduces a permanent Simplified Effective Tax Rate (ETR) Safe Harbour. This safe harbour allows MNE groups, by election, to apply a streamlined ETR calculation based on financial statement data, subject to a limited set of prescribed adjustments.

Under this safe harbour, a jurisdiction qualifies where the simplified ETR is at least 15 percent, or where the jurisdiction is in a “simplified loss” position. Where the safe harbour applies, the jurisdiction is treated as having zero Pillar Two top‑up tax for the relevant fiscal year, and a full GloBE calculation will not be required for that jurisdiction.

The Simplified ETR Safe Harbour generally applies for fiscal years beginning on or after 1 January 2027, with availability for earlier application in 2026 in certain circumstances.

Extension of the Transitional Country‑by‑Country Reporting Safe Harbour

The SbS Package also extends the Transitional Country‑by‑Country Reporting (CbCR) Safe Harbour by one additional year, to years beginning on or before 31 December 2027 and applying a 17% transitional rate. This extension avoids an abrupt compliance cliff and provides MNE groups with additional time to transition to the Simplified ETR Safe Harbour or the full GloBE calculations.

Substance-Based Tax Incentive Safe Harbour

The SbS Package introduces a new Substance‑Based Tax Incentive Safe Harbour. By election, this safe harbour allows for certain qualifying tax incentives that are linked to substantive economic activity (expenditure based or production based) to be taken into account when determining Covered Taxes for Pillar Two purposes.

The availability of the safe harbour is subject to caps that are tied to the level of substance in the jurisdiction, ensuring that only incentives aligned with genuine economic activity are recognised.

An election to apply the Substance‑Based Tax Incentive Safe Harbour can apply for income years beginning or on after 1 January 2026.

Side-by-Side System

The key feature of the SbS Package is the Side‑by‑Side System, which is designed to allow Pillar Two to coexist with domestic tax regimes that deliver comparable minimum tax outcomes.

Under the Side‑by‑Side Safe Harbour, MNE groups with their Ultimate Parent Entity (UPE) in a jurisdiction that has implemented a Qualified SbS Regime may elect to obtain relief from the application of the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). Application of the Qualified Domestic Minimum Top‑Up Taxes (QDMTTs), however, remain unaffected by the Side-by-Side Safe Harbour. As of January 2026, the United States is the only jurisdiction that qualifies under this regime.

The package also introduces a separate UPE Safe Harbour (to replace the Transitional UTPR Safe Harbour), which allows an election to switch off the UTPR in respect of UPE jurisdiction profits where the UPE jurisdiction has an eligible domestic minimum tax regime but does not have an eligible worldwide regime.

Both the Side‑by‑Side Safe Harbour and UPE Safe Harbour apply for fiscal years beginning on or after 1 January 2026.