‘Arguably necessary’: RSM tax experts welcome updated OECD tax framework

Last week, the Organisation for Economic Cooperation and Development (OECD) unveiled a fresh ‘side by side’ global minimum tax package which included exemptions for US multinationals under global minimum tax rules.

RSM Australia technical tax partner Liam Telford and tax advisory partner Liam Delahunty told Accounting Times the side-by-side model was an arguably necessary movement towards a ‘coexistence’ model of international tax frameworks, where different systems were recognised as equivalent given certain standards were met.

Under the recently-published OECD framework, qualified side by side (SbS) regimes would be granted exemptions from income inclusion (IIR) and undertaxed profits (UTPR) rules under the SbS safe harbour.

“Critically, Qualified Domestic Minimum Top Up Taxes (QDMTT) still apply even where a constituent entity’s ultimate parent entity is located in a Qualified SbS Jurisdiction. This will ensure that source countries retain the right to apply top-up tap to ‘undertaxed’ income,” Telford and Delahunty noted.

“It is the extraterritorial aspects of Pillar Two (e.g., the Undertaxed Profits Rule (UTPR)) that would be switched off.”

However, they noted that the removal of the UTPR could prejudice the notion of a global minimum tax for entities that had an ultimate parent in a qualified SbS jurisdiction. If there was no QDMTT backstop, there would be no global minimum tax applied in these cases.

Telford and Delahunty added that the side-by-side system was only one component of the OECD’s new package, which included other welcome measures surrounding the OECD global minimum tax standards.

“Other components such as the permanent simplified effective tax rate [SETR] safe harbour, substance-based tax incentive [SBTI] safe harbour, and extension of the transitional CbCr safe harbour, should very much be welcomed,” they noted.

The SETR safe harbour, designed to reduce compliance burdens for in-scope multinational entities (MNEs), would now apply permanently from either 1 January 2026 or 1 January 2027. Under this rule, top-up tax will be deemed nil for a jurisdiction where a MNE’s simplified effective tax rate was at least 15 per cent, or they have an overall ‘simplified loss’ for that jurisdiction.

Furthermore, the transitional country-by-country reporting safe harbour was extended an additional year to include income years beginning on or before 31 December 2027, giving MNEs more time to adapt to the reporting requirements.

Lastly, the SBTI would permit MNE groups to benefit from tax incentives strongly connected to economic substance, acknowledging that tax incentives were a widely used tool to promote investment.

The OECD said the side-by-side arrangement was a “way forward” for the 147-country partnership against Base Erosion and Profit Shifting (BEPS), an international effort to impose a 15 per cent global minimum tax rate and curb multinational tax avoidance.

The SbS safe harbour would also simplify compliance for MNEs headquartered in jurisdictions with a tax system that imposed “minimum tax requirements” with respect to domestic and foreign income.

This safe harbour would only apply to regimes that ensured their domestically headquartered MNEs had “no material risk” of paying a tax rate below 15 per cent for their domestic or foreign operations, the OECD said.

Eligible jurisdictions would also be required to incorporate “substantial mechanisms” to address base erosion and profit shifting risks, the OECD stipulated. As of 1 January 2026, the only qualified SbS regime recognised by the OECD was the US.

Telford and Delahunty added that the SbS system would only apply to income years beginning on or after 1 January 2026, meaning that US-headquartered MNE groups would still be subject to the income inclusion rule (IIR) and UTPR for the two years prior.

The US’ position on this is unknown, the pair noted.