‘Side by Side’ Global Tax Deal Tests Pillar Two’s Staying Power

The OECD’s long-awaited side-by-side package is a pragmatic attempt to preserve the global minimum tax architecture while accommodating the unique position of US multinationals. That pragmatism, however, comes with limits.

While the guidance delivers political and administrative relief, it exposes stress points in the underlying new design of Pillar Two, the second part of the Organization for Economic Cooperation and Development’s global tax fairness plan that created the 15% minimum tax for large businesses.

For many US multinationals, the most consequential short-term aspect of the package is what it doesn’t do—it doesn’t retroactively eliminate compliance obligations for 2024 or 2025. Those years remain fully in scope, with 2024 global base erosion information return filings due as soon as June.

Many US multinationals have delayed implementation decisions awaiting clarity on where the regime was headed. However, the more than 80 pages of coordinating rules in the side-by-side package show that US multinationals are on the hook for the past two years. With filing deadlines approaching, the focus shifts from deliberation to execution.

The longer-term implications are less certain. Carving US multinational groups, which represent nearly a quarter of the in-scope population, out of core mechanics opens the door to parallel paths. Jurisdictions can align with Pillar Two as designed or pursue alternative minimum tax regimes that resemble the framework while operating on distinct terms.

That optionality raises questions about whether Pillar Two can sustain its original ambition of uniform global rules applied consistently to address base erosion and profit shifting.

Rethinking Readiness

Companies are now being asked to prepare for a regime that will operate in one form for the next two years and quite differently thereafter. In practical terms, US multinationals are planning for three different systems in three consecutive years.

In 2024, the regime requires full-scope calculations and first-cycle readiness. In 2025, the undertaxed profits rule becomes a live risk in parts of the structure, even if the US parent itself is protected by existing safe harbors.

In 2026, the system shifts again, with reporting and local top-up taxes remaining, but core mechanics switched off for US groups.

Over the past two years, US multinationals largely divided into two camps. Some treated Pillar Two as a permanent shift and invested early in enterprise-scale redesigns built for a complex steady state. Others delayed, betting that political or technical developments would narrow, or unwind the regime.

The side-by-side package alters the assumptions underlying those approaches and clarifies the near-term path, while calling into question the scale and timing of longer-term investments. Interim solutions, including outsourcing or other targeted measures, may be more rational than enterprise-scale redesigns built for a world that no longer exists.

For many groups, pragmatic compliance in 2024 and 2025 may be sufficient, with larger decisions deferred until the 2026 compliance burden becomes clearer.

The implications extend to cost and tooling. As major mechanics fall away, the need to run complex calculations for intermediary holding companies or sideways, extraterritorial taxes diminishes, along with associated data demands. As a result, software costs are likely to decline, compliance and provision timelines should compress, and overall staffing demands may ease.

In practice, Pillar Two has become a two-speed problem. The first filing cycle demands urgent execution. Longer-term design decisions can wait until the post-side-by-side rules fully take shape.

Broader Implications

Excluding US multinationals from significant portions of Pillar Two raises legitimate questions about the regime’s long-term coherence and durability. It also creates incentives for other countries to pursue alternative approaches rather than adopting the model rules wholesale.

It’s too early to conclude that the side-by-side package imperils Pillar Two. What it does is introduce a durability test. As a sizeable share of the largest in-scope groups are carved out of the income inclusion and undertaxed profits rules, the system’s center of gravity shifts toward domestic minimum top-up taxes and away from uniform backstop enforcement.

The US carve out also creates a pathway for other jurisdictions to seek similar relief through bespoke minimum-tax regimes. That could further fragment the model rules into parallel variants, producing less consistency across jurisdictions, greater political negotiation over what constitutes a “qualifying” regime, and a higher risk of disputes over taxing rights—outcomes the original framework was, at least in principle, designed to avoid.

These issues will come into focus during the OECD’s planned “stocktake,” its formal review of how the Pillar Two regime operates after the side-by-side rules take effect. That process will examine real-world divergences in outcomes.

Some divergences are already visible. Consider a foreign subsidiary operating in a zero-tax holiday jurisdiction. In many cases, that income would face an effective rate of roughly 12.6% under US rules, while Pillar Two would require a top-up to 15%. The substance-based income exclusion may narrow that gap, but it’s unlikely to eliminate it in all cases.

Another area of divergence involves US passthrough structures, such as S corporations and partnerships, with dispersed ownership. Under US controlled foreign corporation rules, minimum tax exposure often turns on the presence of 10% ultimate owners by vote or value, a threshold that may not be met in many common structures.

In those cases, low-taxed activity could fall outside both minimum-tax regimes unless a local qualified domestic minimum top-up tax applies once the side-by-side election is effective. In other words, those structures may still produce a low- or no-tax outcome.

The stocktake will assess the significance of these gaps. Its findings could lead to further rule changes, additional eligibility requirements, or new layers of complexity as the OECD attempts to align parallel systems designed to achieve similar outcomes. As more countries observe the US experience, pressure for comparable treatment elsewhere may grow.

In that sense, exempting the largest share of Pillar Two’s population may prove to be the regime’s most consequential test of its staying power.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Cory Perry is a partner in Grant Thornton’s Washington National Tax Office and has worked for more than 16 years in international tax.

Max Cogan is a tax manager in Grant Thornton’s Washington National Tax Office.

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