The United States and the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) have agreed on a “Side-by-Side” (SbS) arrangementFootnote ¹ that exempts U.S. multinationals from the global minimum tax regime.Footnote ² That regime—Pillar Two of the Inclusive Framework’s Two-Pillar Solution that the Biden administration was instrumental in negotiating and concluding—seeks to stymie tax avoidance by large multinational enterprises.Footnote ³ President Donald J. Trump withdrew the United States from the Inclusive Framework and the Two-Pillar Solution at the start of his second term and directed the treasury secretary to present options for “protective measures” in response to “[d]iscriminatory and [e]xtraterritorial [t]ax[es].”Footnote ⁴ Shortly thereafter, the administration, with the assistance of congressional Republicans, threatened retaliatory taxes on any country that applied Pillar Two’s rules to U.S. companies, a move that, if implemented, would have doomed the agreement.Footnote ⁵ The SbS arrangement saved Pillar Two, and since U.S. law establishes a corporate minimum tax on foreign income, Pillar Two’s goals remain largely, if imperfectly, intact.

Pillar Two establishes a global minimum tax rate on entities that are members of multinational enterprises that have annual revenue of €750 million or more (in two of the preceding four fiscal years) and provides a global means of collecting that tax, regardless of where the entities are headquartered.Footnote ⁶ It gives priority to the home jurisdictions of covered entities and their parents to tax income at the 15 percent minimum rate, including, if necessary, the levying of “top-up” taxes to get to that number.Footnote ⁷ (Top-up taxes in an entity’s home jurisdiction are called Qualified Domestic Minimum Top-up Taxes (QDMTT). Top-up taxes in a parent’s jurisdiction are enacted under the Income Inclusion Rule (IIR).)Footnote ⁸ But if these jurisdictions fail to impose taxes that achieve the minimum rate, other jurisdictions where covered entities operate can make up the gap under Pillar Two’s Undertaxed Profits Rule (UTPR). To date, more than thirty countries have adopted legislation incorporating top-up taxes and the UTPR, including Australia, Canada, Japan, South Korea, Switzerland, the United Kingdom, and nearly all European Union member states.Footnote ⁹ Congress, though, refused to incorporate Pillar Two’s requirements despite the urging of the Biden administration.Footnote ¹⁰ Covered U.S. multinationals have consequently had to pay additional taxes on their entities located in countries that have incorporated Pillar Two’s rules.Footnote ¹¹

With the possibility of U.S. retaliatory taxes floated, and against the background of a global tariff war already in progress,Footnote ¹² Secretary of the Treasury Scott Bessent entered into discussions to exempt U.S.-parented groups from Pillar Two’s application. The United States argued that its tax laws already had rules—the Global Intangible Low-Taxed Income (GILTI) regime enacted in 2017 (now known as Net CFC Tested Income)—that achieved the same minimum tax goals as Pillar Two, and so the Inclusive Framework’s system need not apply to U.S.-headquartered companies.Footnote ¹³ In late June 2025, the G7 announced “a shared understanding that a side-by-side system [that would exclude U.S. multinationals from Pillar Two] could preserve important gains made by jurisdictions in the Inclusive Framework in tackling base erosion and profit shifting and provide greater stability and certainty in the international tax system moving forward.”Footnote ¹⁴ The threat of U.S. retaliatory taxes was withdrawn pending the Inclusive Framework’s adoption of rules that implemented a side-by-side system.Footnote ¹⁵ Those rules were finalized just over six months later, in early January 2026.Footnote ¹⁶

Announcing the final deal, Secretary Bessent said that the SbS system “recognizes the tax sovereignty of the United States over the worldwide operations of U.S companies and the tax sovereignty of other countries over business activity within their own borders.”Footnote ¹⁷ OECD Secretary-General Mathias Cormann called the SbS agreement a “landmark decision in international tax co-operation” that “enhances tax certainty, reduces complexity, and protects tax bases.”Footnote ¹⁸

In adopting the SbS system, the Inclusive Framework “recognize[d],” as the United States had argued, “that some jurisdictions may already have implemented a tax regime which incorporates minimum taxation requirements with respect to the domestic and foreign income of [covered multinationals that are] headquartered in that jurisdiction.”Footnote ¹⁹ Consequently, the Inclusive Framework concluded, “[w]here such tax regimes have and maintain similar policy objectives, overlapping scope, and a complementary policy impact as the [global minimum tax], . . . [it] has agreed to [not to apply provisions of Pillar Two to covered multinationals] . . . headquartered in [such] jurisdictions.”Footnote ²⁰

The SbS system operationalizes Pillar Two’s non-applicability to those jurisdictions through the institution of two safe harbors.Footnote ²¹ The Side-by-Side Safe Harbor exempts entities with an Ultimate Parent Entity (UPE) located in a “Qualified SbS Regime” from the IIR and the UTPR.Footnote ²² The Ultimate Parent Entity Safe Harbor exempts entities with a UPE located in a “Qualified UPE Regime” only from the UTPR.Footnote ²³ Neither safe harbor exempts entities from the QDMTT, allowing states to tax U.S. subsidiaries at the 15 percent rate. It is likely, though, that U.S. multinationals, as well as the U.S. government, will pressure countries not to apply the QDMTT to U.S. investments, even though they are permitted to do so.Footnote ²⁴

Concurrent with the announcement of the SbS agreement, the Inclusive Framework designated the United States a Qualified SbS Regime, allowing U.S. multinationals to benefit from the Side-by-Side Safe Harbor.Footnote ²⁵ No other states have been designated under either of the safe harbors to date. Some, though, may decide to revise their domestic laws to become eligible instead of adopting the Pillar Two rules, potentially creating a patchwork system in place of the Pillar Two’s intended uniformity.Footnote ²⁶ It will take time to implement the SbS agreement since countries that have already adopted the IIR and the UTPR will need to amend their tax laws to incorporate the safe harbors. Secretary Bessent said that “Treasury will continue engaging with foreign countries to ensure full implementation of the agreement.”Footnote ²⁷ The Republican chairs of the House Ways and Means Committee and the Senate Finance Committee warned that delays will lead to the revival of the retaliatory tax that had been shelved.Footnote ²⁸

Though the designation of the United States as a Qualified SbS Regime reflects the Inclusive Framework’s conclusion that the goals and impact of the U.S. tax system are sufficiently similar to those of Pillar Two, the U.S. tax system differs in important ways, providing significant advantages to U.S. multinationals. The Internal Revenue Code taxes the foreign income of U.S. companies at a 12.6 to 14 percent effective rate, below the 15 percent minimum required by Pillar Two.Footnote ²⁹ The Code also allows the United States to permit companies to offset low-taxed income from one jurisdiction with higher-taxed income in another jurisdiction, avoiding the Pillar Two’s requirement that the minimum rate be applied on a jurisdictional basis.Footnote ³⁰ The non-applicability of the IIR and the UTPR will also benefit covered U.S. multinationals by lowering compliance-related administrative costs. Altogether, the SbS agreement will save U.S. companies over $100 billion, according to Secretary Bessent.Footnote ³¹

The SbS agreement does not resolve the challenge that the other half of the OECD deal—Pillar One—sought to solve: the taxation of digital profits.Footnote ³² Technology companies—many of which, including Alphabet, Amazon, and Meta, are headquartered in the United States—want to avoid taxes on income received from users in countries in which they have no physical presence. Countries where users are located have created mechanisms, including digital services taxes, to collect taxes on the digital income of those technology companies. When announcing the SbS arrangement, Secretary Bessent said that the United States will “move toward a constructive dialogue on the taxation of the digital economy.”Footnote ³³ U.S. Trade Representative Jamieson Greer, though, subsequently announced the initiation of section 301 investigationsFootnote ³⁴ of states that impose digital taxes on U.S. companies,Footnote ³⁵ a measure that was anticipated early in the administrationFootnote ³⁶ and employed during the president’s first term.Footnote ³⁷ Pillar One discussions are ongoing at the OECD, but Deputy Assistant Secretary for International Tax Affairs Rebecca Burch said that the United States “believes Pillar One isn’t the right framework to restart a dialogue on taxing the digital economy” and “we have to slow down and be very cautious about running to a solution.”Footnote ³⁸ Discussions are also ongoing regarding digital services taxes at the United Nations, where a Framework Convention on International Tax Cooperation is being negotiated. In February 2025, the United States announced that it would not participate in the UN negotiations.Footnote ³⁹