By Zorka Milin and Thomas Georges 

On January 5, 2026, the OECD announced that the more than 140 countries within the Inclusive Framework had agreed on new guidance for the global corporate minimum tax regime that, among other changes, exempts U.S.-headquartered multinationals from key portions of the minimum tax. This new guidance simultaneously waters down and preserves the global minimum tax, known as Pillar Two, a major multilateral effort to curb the abuse of tax havens by large multinationals.

While this new guidance produces a fragmented and flawed “side-by-side” system, it is nonetheless preferable to either the complete abandonment of the global minimum tax or to the punitive tax and trade actions threatened by members of Congress and the Trump administration in response to the prospective application of the minimum tax to U.S. companies. 

However, a far better approach would be for the U.S. Congress to reform the tax code’s treatment of the foreign profits of U.S. companies, such that it meets the minimum standard established at the OECD. Such reform would take into account the needs of American workers, level the playing field for smaller domestic businesses, and raise much-needed new revenues to pay for domestic priorities. 

The New “Side-by-Side” System

The new guidance establishes a “side-by-side safe harbor” that sets criteria under which a country can insulate its multinational companies from certain Pillar Two taxes. Those criteria are designed to precisely mirror the U.S. status quo, effectively setting the current U.S. policy as a new alternative “floor” for Pillar Two minimum taxes. Currently, the United States is the only qualified regime, but other eligible countries could request to qualify in 2027 and 2028.  

Importantly, U.S. companies are not fully exempt from all foreign taxes. They are only exempt from two “backstop” taxes within the Pillar Two system called the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). Dozens of nations that have implemented a domestic minimum tax (called the Qualified Domestic Minimum Top Up Tax, or QDMTT) will still be able to collect a minimum level of tax on profits earned by U.S. companies within their borders. In effect, a key element of Pillar Two – the widespread adoption of minimum corporate taxes around the globe, including in many historical tax havens – is not directly affected by the new side-by-side system.

While domestic minimum taxes remain unaffected, the core of the side-by-side system is a new safe harbor that insulates U.S. companies from the two previously mentioned backstop taxes – the IIR and UTPR – that kick in when other jurisdictions fail to levy a minimum tax on activity within their borders. [1] More importantly, the safe harbor only matters as long as the U.S. itself fails to tax its companies’ profits adequately. While U.S. Treasury and business groups have defended the robustness of the U.S. tax system, there is good reason to believe that current U.S. policy likely falls behind the Pillar Two minimum standard.

U.S. Tax System Softer on Foreign Profits than Pillar Two

Since 2017, the U.S. has imposed the world’s first global minimum tax, known as the Global Intangible Low-Taxed Income (GILTI) regime, reformed and renamed in 2025 to the Net CFC Tested Income (NCTI) regime. While NCTI and Pillar Two share broadly similar policy objectives, the two systems diverge in important ways, highlighted in the table below.

Table: U.S. Tax System and Pillar Two At-a-glance

	U.S. System (NCTI)	Global Standard (Pillar Two)
Base	Taxable income	Modified book income
Rate	12.6 – 14 percent	15 percent
Application	Aggregate foreign income	Country-by-country
Exempt income	Oil and gas extraction income [2]	Certain income from local production
Scope	All U.S. multinational corporations	All multinationals with average annual revenue > EUR 750 million

The U.S. and global tax regimes differ in rates and scope, but the key difference is that U.S. corporations are taxed on their total combined foreign profits in the aggregate, whereas Pillar Two’s minimum tax applies in every jurisdiction separately. The result of this disparity is that U.S. corporations have more leeway to keep using tax havens than would be possible under Pillar Two, because they can reduce their overall tax rates by “blending” income from high-tax and low-tax jurisdictions. [3]

The side-by-side system is not set in stone, but will be subject to a “stocktake” review by 2029 to identify and address any substantial risks to the level playing field or increase in profit-shifting to tax havens. Central to that review should be the question of whether the U.S. adequately taxes its companies’ foreign profits relative to the globally-agreed minimum standard.

New Agreement Hinges on U.S. Corporate Alternative Minimum Tax 

To qualify for side-by-side safe harbor, countries must meet several tax standards. Currently, the U.S. is the only qualifying jurisdiction, and the standards are set close to the current U.S. tax policy baseline. Specifically, the side-by-side regime would be jeopardized by further U.S. corporate tax cuts, such as: 

• reducing the statutory corporate rate below 20 percent;
• repealing or reducing the rate or scope of the corporate alternative minimum tax (CAMT); or
• reducing taxes on the foreign income of U.S. corporations through the NCTI or Subpart F regimes.

In other words, the agreement is premised on the U.S. having a domestic corporate rate of at least 20 percent, and a meaningful domestic and global minimum tax. Crucially, the U.S. domestic tax system must present “no material risk” of producing sub-15 percent effective tax rates. It is questionable whether the U.S. corporate tax system passes this test since the 2017 tax cuts, and even more so given the new and expanded corporate tax breaks passed in 2025. In this context, the CAMT backstop takes on heightened importance. As such, the U.S. Treasury’s continued regulatory weakening of the CAMT could jeopardize the eligibility of the U.S. for side-by-side treatment in the future, in addition to being wasteful and likely unlawful.

New, Permanent Safe Harbors Weaken Global Standards

As well as the new side-by-side system, the OECD’s guidance also establishes additional new safe harbors.

First, it provides special treatment for certain tax incentives, notably the U.S. research and development (R&D) credit. This issue has long been a sticking point for the U.S. on Pillar Two, going back to the Biden administration. Previously, OECD’s minimum tax formula treated the U.S. R&D credit less favorably than similar incentives in other jurisdictions. To address these U.S. complaints, the OECD could have simply aligned the treatment of the U.S. R&D credit with comparable foreign incentives. Instead, there is now an entirely new safe harbor that is both broader than necessary (including both incentives based on corporate expenditures, like R&D, as well as incentives for producing goods) and more generous than anything previously allowed. 

The new guidance effectively weakens Pillar Two for all companies and jurisdictions, rather than simply fixing a small incongruity between jurisdictions’ various incentives. In addition, the safe harbor will mostly benefit developed countries that have higher payroll costs and greater manufacturing base of tangible assets, feeding into the ongoing critiques of the OECD as a rich countries club that disadvantages developing countries.

The OECD is also extending the previous transitional safe harbor that had shielded most U.S. companies, and many companies globally, from broad compliance with Pillar Two. That policy is now set to expire at the end of 2026, and a new “simplified effective tax rate safe harbor” mirroring some of the old safe harbor’s mechanics will permanently take its place in 2027. 

The permanent nature of these new safe harbors may risk creating long-running gaps in the Pillar Two framework that companies can exploit to avoid minimum taxes, or that can encourage countries to introduce anti-competitive tax incentives.

Road to Future Reform Remains Open

Even though the side-by-side regime is a regrettable and unnecessary setback, the global minimum tax remains a generational leap forward in the fight against corporate tax avoidance. Unfortunately, the global tax floor has been lowered by accepting the current U.S. system as an alternative to full Pillar Two adoption, but a somewhat diluted minimum standard is still a minimum standard. Reaffirmed commitment and widespread implementation of the global minimum tax by dozens of countries demonstrates that the days of runaway tax competition and the global race to the bottom are behind us, and there does not seem to be much appetite among governments for going back.

The OECD has done what it can for the time being. It’s now up to U.S. policymakers to reform our tax code so it no longer prioritizes the interests of big, ultra-profitable corporations over public revenues, American workers, and our allies around the globe.

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Footnotes

[1] This safe harbor requires retroactive domestic implementation to January 1, 2026, which may be constitutionally precluded in some relevant jurisdictions and, as a result, U.S. companies may have to pay some additional tax in those jurisdictions.

[2] This exemption for foreign oil and gas extraction income is evidently so important to the U.S. administration that the OECD’s new guidance specifically notes oil and gas exemptions as an acceptable feature of a Side-by-Side regime. For more on this exemption, see https://thefactcoalition.org/report/oil-and-gas-tax-subsidies.

[3] To illustrate this, consider a simple example where a company makes $100 of profit in each of two jurisdictions – in the first jurisdiction, they pay $20 in tax, and in the second, they pay $0. Even if NCTI and Pillar Two both had minimum rates of 15 percent, NCTI’s approach of taxing total income results in a much smaller top up tax than Pillar Two’s country-by-country system. Under NCTI, the company has paid $20 on $200 of total income, or 10 percent, and must pay an additional $10 to get to the 15 percent minimum rate. Under Pillar Two, the company would owe no additional tax in the first jurisdiction, where they paid $20 of tax on $100 of income, or 20 percent, but they would owe a full $15 in the second jurisdiction in order to reach the 15 percent minimum. While this is a simple, and relatively extreme, example, it is easy to see how NCTI’s aggregated profits approach encourages continued use of tax havens.