The Side-by-Side Agreement Reshapes US Canadian Subsidiaries’ Tax

October 8, 2021, marked the beginning of the Pillar Two era, when 137 countries (known as the Inclusive Framework and led by the OECD) signed a political agreement to domestically legislate a 15% minimum tax on all profits of multinationals that annually have at least €750 million of gross revenue. On January 5, 2026, the IF (now up to around 150 countries) signed another political agreement (the side-by-side (Sbs) agreement) that should serve to dissolve US objections that had been holding up full international adoption of Pillar Two. This article focuses on how the Sbs agreement affects US multinationals with Canadian subsidiaries.

The Evolution of Pillar Two

The root and origins of Pillar Two predate the October 2021 agreement. Its foundation is grounded in a coalition of US progressives, the EU, and the Organisation for Economic Development which, acting through the G-20, decided in 2012 to try to address the massive tax savings achieved by large US and other multinationals through sophisticated tax haven-linked planning.

In October 2015, the OECD published a report on a 15 point (action) plan to combat what it termed as “base erosion, profit shifting” (BEPS). The package promoted several anti-avoidance measures (e.g., in the areas of financings, hybrids, transfer pricing) but postponed addressing what most considered the largest problem— tax avoidance in the digital sector. The 2015 report recommended that the effect of its other initiatives on the digital sector be observed over the next five years—for further action in 2020 if warranted.

But both the US and the EU jumped the gun.

In the US, even though the Republicans controlled both the White House and Congress, the Tax Cuts & Jobs Act included a 10.5% global minimum tax affecting CFC active business income, previously excluded from attribution under other laws such as Subpart F. The GILTI rules (now renamed by the One Big, Beautiful Bill Act to net CFC tested income), was an obvious trailblazer for what was to come in October 2021.

In Europe, governments became impatient while alleging that mega-US digital transactions were continuing to plunder their treasuries and started to develop digital services taxes to which all factions in the US were opposed.

Those two initiatives (enactment of GILTI and adoption of digital services taxes) saw the OECD-led IF to not only develop Pillar Two’s 15% global minimum tax but also the Pillar One regime (agreed by the IF on October 8, 2021) that would tax 25% of the net profits that exceed 10% of gross revenue of multinationals (having annual gross revenue of at least €20 billion taxed in countries in which they do at least €1 million of business) even if they have no traditional tax nexus to the country. Pillar One has yet to implemented.

Why the US Objected to Pillar Two Before January 5

The problem is that Pillar Two’s structure essentially cedes countries’ control of their tax systems to other countries because countries are required to apply minimum taxes to both its domestic and foreign income—failing which another country may try to collect those taxes.

Example 1. Suppose a US corporation pays no tax on its book income of $1,000 but had Pillar Two been in effect, it wound have paid $150 under the “qualified domestic minimum top up tax” arm of Pillar Two.

Assume further that the US corporation has a subsidiary in Canada with at least $150 of assets and that Cansda has enacted the “under taxed profits rule” (UTPR). Canada would impose $150 of tax on the Canadian subsidiary, undermining the US’s tax policy reasons in not levying tax on the US corporation’s $1,000 of income to which congressional Republicans (and then the Trump administration) were particularly opposed and critical.

Example 2. Assume a US corporation’s CFC earned $1,000, paid no local tax, or GILTI but would have paid $150 US income taxes under the “income inclusion rule” arm of Pillar two.

If the US corporation has a subsidiary in Canada where UTPR was enacted, the $150 in US federal taxes not paid by the US parent would be paid by the Canadian subsidiary to Canada. The congressional Republicans and Trump White House were, obviously, also opposed to this.

US Opponents’ Reaction to Pillar Two

The US opponents to Pillar Two also opposed digital services taxes and attacked both through threats of legislating “revenge taxes” (see proposed §899 of the Code in the OBBBA, which was ultimately dropped, as explained below) or invoking a “revenge tax” already on the books (see Code §891).

The Tradeoff: Revenge Tax for SbS Agreement

Towards the end of June 2025, Congress was trying to finalize the OBBBA, including a version of the §899 tax, and the G7 was meeting in Canada on a variety of matters, including the two Pillars. The parties were able to make a deal (a SbS deal) whereby the US would drop the proposed revenge tax and the G7 wouldarrange for the IF to agree to exempt US multinationals from the income inclusion rule and UTPR, but not the qualified domestic minimum top-up tax branches of Pillar Two.

The G7 delivered, as the January 5 agreement sets out the final terms of the June 2025 agreement, reflecting that the IF accepted the US’s position that its tax rules deliver minimum tax results comparable to those arising under Pillar Two, without the US adopting Pillar Two, per se.

How the SbS Agreement Affects US Multinationals with Canadian Subsidaries

With respect to the US and its inscope multinationals, the January 5 agreement provides two different exemptions (safe harbors)from top-up taxes: (1) the SbS safe harbor that protects against IIR or UTPR top-up taxes imposed by other countries; and (2) the UPE safe harbour that only protects against UTPR.

The SbS safe harbour operates through three interconnected rules.

First, the US must meet the definition of a qualified SbS regime jurisdiction. The criteria (that include eligible domestic and foreign tax systems and domestic alternative minimum tax systems) have been crafted so that the US meets them. Proof of status requires listing in a “central register,” and the US has already been listed.

The AMT requirement is considered met as long as the AMT applies to a “substantial portion” of the total pre-tax book profits of all inscope multinationals in the jurisdiction. In the case of the US, and its corporate alternative minimum tax, which only applies to groups with a pre-tax book profit of at least $1 billion, the aggregate of the pre-tax book profit of CAMT filers would have to be considered a “substantial portion” of the aggregate pre-tax book profits of all inscope US multinationals. That obviously is the conclusion the IF reached regarding the US (although no specifics have been published) given that the US has been listed in the central register as a Qualified SbS Regime jurisdiction. Finally, on “substantial portion,” AI-generated rough numbers indicate that the aggregate pre-tax book profits of CAMT filers is about 60% of the aggregate pre-tax book profits of all inscope US groups.

Second, the corporation must be part of a group the ultimate parent of which is based in the US.

Third, the filing member of the relevant group must elect for the benefits of the SbS regime.In a broad canvass of the January 5 package, appearing in TMIJ, Miles Humphrey and Ethan Kroll explain why a US group would not elect the SbS safe Harbour and instead elect the inferior protection under the UPE regime. See Pillar Two: No Time To Die , Die Another Day, You Only Live Twice, Tax Mgmt. Int’l J. (Jan. 14, 2026).

Section 5(2)(1) of the January 5 document states that for those entities eligible for the SbS regime, their liability for top-up taxes under the IIR and UTPR of any jurisdiction is deemed to be zero.

The effects of this regime for US groups with subsidiaries in Canada can be seen by reference to the two examples set out above and section 5(4)'s third sentence.

In the first example, Canada imposed a top-up tax of $150 under its forthcoming UTPR on a Canadian subsidiary of a US group because its underpayment of US tax on its US operations. The new SbS rules will eliminate that Canadian UTPR liability.

In the second example, Canada imposed the same UTPR tax because the US parent of a third country CFC did not pay to the US a top-up tax arising because CFC did not pay sufficient tax and GILTI did not fill the deficiency.

The new SbS will eliminate that Canadian UTPR liability.

Finally, the new SbS regime will eliminate Canadian IIR tax where, for example, a US based multinational owns a Canadian subsidiary which owns a third country CFC which earns $1,000 but pays no tax. Absent the new January 5 initiative, Canada would assess the Canadian subsidiary $150 under Canada’s IIR in its Global Minimum Tax Act. But as specially confirmed in para 4 of section 5 of the January 5 document, that $150 will be exempt.

The second safe harbour that will protect US groups from Canadian UTPR - but notIIR top-up tax will arise under the ultimate parent entity (UPE) safe harbour regime.

This requires that the US meet the qualified UPE safe harbour regime test which is narrower than the SbS safe harbour regime test and that the group have a US UPE.

Finally on the UPE safe harbour, the language used is confusing or perhaps confused. It says “the top-up tax for the UPE jurisdiction shall be deemed nil.” Is that wrong? Should it say “the top up tax under the UTPR of the jurisdiction in which there is a constituent entity of an UPE that is located in a jurisdiction that qualifies for the UPE safe harbour shall be deemed nil”?

Takeaways

The January 5 SbS package benefits US groups by exempting them from Canadian IIR and UTPR top-up taxes, although the package does not exempt a US-owned Canadian subsidiary from Canadian QDMTT in respect of its own operations.

Beyond the scope of this article are three other safe harbours in the January 5 package that are of general application and interest. These are covered by Humphrey and Kroll, supra.

Finally, if Canada were to follow the recommendation of two Canadian tax lawyers, Kaitlin Grey and Patrick Marley in Canada Should Follow in the Footsteps on Pillar Two Carve Out, Daily Tax Rep. (Jan. 23, 2026) (and scrap its prior adoption of Pillar Two), US multinationals with subsidiaries in Canada would no longer need SbS protection from a Canadian IIR (for lower tier non-Canadian CFCs) or a Canadian UTPR (for inadequate tax payments by the group in the US or elsewhere outside Canada). However, the foreign lower tier CFC arrangement would probably attract a new GILTI type rule that Canada would have to add to its Income Tax Act so as to meet the the eligible foreign income system requirement of the Qualified SbS safe harbour regime status it would need to switch out of the Pillar Two regime.

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

Nathan Boidman, retired Canadian attorney and CPA, specialized in Canada-US taxation and is now founding a non-profit Canada-US taxation center.

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