David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: side-by-side comparison.

A lot has happened in the past few months as policymakers have been working to implement the agreement reached between the U.S. and its OECD partners. The April 2025 proposal for a side-by-side agreement left many questions unanswered. And now we're starting to see what this new approach will mean for companies around the world.

To help us sort through all the moving parts, I'm joined by Tax Notes chief correspondent Stephanie Soong. Stephanie, welcome back to the podcast.

Stephanie Soong: Great to be here.

David D. Stewart: So why don't we start off with where things stood the last time you were on. So in May 2025, what was going on?

Stephanie Soong: At the time, the United States was seeking a politically acceptable and stable coexistence between the global intangible low-taxed income regime and the pillar 2 regime, and they argued that the U.S. multinationals shouldn't have to be subject to two different minimum tax systems.

The U.S. delegation presented their case at the April meeting of the OECD inclusive framework on base erosion and profit shifting, which took place in Cape Town, South Africa. Rebecca Burch, Treasury's OECD negotiator, then said at a conference in May that the so-called side-by-side system had to be enacted by the end of 2025.

That proposed timeline came shortly after House Republicans proposed adding a new section 899 to the Internal Revenue Code, which quickly became known as the revenge tax.

The new section, which was included in the initial drafts of what's now known as the One Big Beautiful Bill Act, would've progressively increased U.S. federal tax rates for individuals and companies based in jurisdictions that enforce an unfair tax, until the jurisdiction in question repeals the tax. Unfair foreign taxes included the undertaxed profits rule, which is a crucial part of the architecture of the global anti-base-erosion rules under pillar 2.

Burch later confirmed that section 899 was being used as a backup to strengthen the U.S. position in multilateral negotiations. At the end of June 2025, the G7 issued a joint statement saying that they had approved the principles of the side-by-side system.

David D. Stewart: So what are these principles of the side-by-side system?

Stephanie Soong: The side-by-side regime would first exclude U.S.-parented groups from the GLOBE rules: the income inclusion rule and the undertaxed profits rule. It included a commitment to ensure that unfair competition and base erosion and profit shifting would be addressed.

It would also be designed along simplifications to the administration and compliance framework of the GLOBE rules, and it would be designed alongside potential changes to treatment of substance-based nonrefundable tax credits, so they're more aligned with the treatment of refundable tax credits.

That last point is important for the effective tax rate calculation, which is covered taxes divided by GLOBE income. Qualified refundable tax credits are treated like income, while nonrefundable tax credits decrease covered taxes. If a credit reduces taxes, the numerator is lowered, which can make the ETR go below 15 percent and result in a top-up tax. If a credit is treated like income, it won't decrease the ETR in the same way, so no top-up tax is likely. So in exchange for agreement on all these principles, the U.S. dropped section 899.

David D. Stewart: So where did the negotiations go from there?

Stephanie Soong: The inclusive framework started thinking about ways to address the U.S. concerns and set an end-of-2025 deadline for agreement on the side-by-side system.

And as the deadline loomed, some countries started pushing back, saying they couldn't support the work if they couldn't get the same kind of flexibility that the U.S. asked for. Estonia was a pretty outspoken inclusive framework member. Its delegation said at the beginning of December 2025 that they wouldn't agree to the side-by-side proposal, but those holdouts eventually came around.

Apparently the inclusive framework did reach an agreement by the end of 2025, but all objections were withdrawn on January 5, and then the OECD published a big package of pillar 2 guidance that same day.

David D. Stewart: So what are the highlights of this package that came out?

Stephanie Soong: The package contains several elements, including the side-by-side safe harbor, a framework that allows jurisdictions with a qualifying domestic minimum tax regime to operate alongside the GLOBE rules so that eligible MNE [multinational entity] groups would have no GLOBE top-up tax if the group's ultimate parent entity is in a jurisdiction with a qualified side-by-side regime.

Qualified domestic minimum top-up taxes remain intact. Related to that is the ultimate parent entity safe harbor, under which there will be no UTPR top-up tax if the UPE is in a jurisdiction with a qualified UPE regime.

Then there's a permanent simplified ETR safe harbor under which the top-up tax in a tested jurisdiction in a fiscal year would be zero if a tested jurisdiction has a simplified ETR of at least 15 percent.

The package also included the substance-based tax incentive safe harbor, which eliminates top-up tax that would've been attributed to qualified substance-based tax incentives. This means that those kind of tax incentives won't automatically depress the ETR and lead to top-up taxes.

The safe harbor also ensures that those tax incentives aren't neutralized, and the transitional country-by-country reporting safe harbor was also extended by one year.

David D. Stewart: All right, so where do things go from here?

Stephanie Soong: Some countries have already said that they would start implementing the side-by-side safe harbor and other safe harbors. The European Commission published a notice in the EU's official journal that recognized the content of the side-by-side package as a safe harbor under article 32 of the pillar 2 directive; my colleague Elodie Lamer has written extensively about this.

In late January, the Japanese Cabinet approved a tax reform measure to include the side-by-side package in its tax system, and most recently, Finland proposed legislation to amend its global minimum tax regime to incorporate the safe harbors. And the Netherlands said that they would do the same, issuing legislation before the summer, and I expect more jurisdictions to follow suit.

I also expect that some countries will request that the inclusive framework assess whether their minimum tax systems meet the criteria for a qualified side-by-side or UPE regime, and they have to do that by the end of the first half of this year. And jurisdictions that don't request an early assessment would be able to do that in 2027 or 2028.

David D. Stewart: So beyond the immediate changes, what sort of things are we expecting to see somewhere down the line?

Stephanie Soong: So looking further into the future, the inclusive framework is going to carry out a stocktaking exercise to evaluate how the side-by-side system is working in practice. It's supposed to look at whether the side-by-side framework is creating unintended advantages or disadvantages between groups headquartered in different jurisdictions. And it's supposed to evaluate whether the interaction between the qualified side-by-side regimes and the GLOBE rules is leading to base erosion or profit-shifting opportunities.

That exercise is slated to wrap up by 2029, and in the meantime, there are concerns that companies are already thinking about restructuring or moving their activities to jurisdictions that might qualify for the side-by-side safe harbor.

PwC recently sent a letter to the Dutch lawmakers. They warned that they were getting signals from companies that are considering moving their headquarters to the United States, relocating their European headquarters to non-EU countries, or shifting their valuable activities like research and development elsewhere to avoid a competitive disadvantage. PwC recommended a few potential responses, including a corporate income tax rate cut.

And it's kind of ironic that pillar 2 was supposed to set a floor on tax competition, and yet the side-by-side system may end up fueling more tax competition. We will see where things go from here.

David D. Stewart: Well, there's definitely a lot to keep an eye on, and it doesn't seem like this is the end of the story, but just the beginning of a new story. So, Stephanie, thank you for bringing us up to speed so far.

Stephanie Soong: You're welcome. Thank you for having me.

David D. Stewart: That's it for this week. You can find me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.