Pillar Two: The Side-by-Side Package

[MUSIC] Welcome to Cross-Border Tax Talks, where we discuss the latest trends in international taxation. From US tax to the OECD's latest developments. I'm Doug McConey, PWC's International Tax Services Global Leader. PWC's Pillar 2 Engine, powered by Beacon, is a game changer for pillar 2 compliance, provision, and modeling calculations. Built on a graph system, utilizing over 20 years of international tax technology. This cloud-based centralized rules engine is developed by a team of pillar 2 tax experts from around the globe. PWC's Pillar 2 Engine is currently available as a service and is also available to license. On this week's episode of Cross-Border Tax Talks, we're back in PWC's policy on demand studio in Washington, D.C. We're excited to have Beth Bell back on the podcast. Beth recently joined PWC as a principal in our Washington National Tax Services Policy Office. Prior to joining PWC, Beth was a senior advisor to the US Treasury Department, Tax Council for the US House Committee on Ways and Means, and also served as a policy director and tax council in the United States Senate. Beth, welcome back to the podcast. I am very excited to be here. All right, so you are the only second guest to do back-to-back podcasts. I'm honored with Pat Brown. Okay. We did like an, oh, we did this torturous OB-3, you know, during that time we had Pat on going through in the process of legislation and the House Bill, the Senate Bill, the final, and so congratulations. I mean, so more honored to be in that company. All right. So when we had originally scheduled the podcast where we were, I was very, I was just really excited for the last podcast. So we get some of the congressional history and the take on really the inception of pillar two. But when we originally scheduled that, we had kind of thought that we might have a side-by-side agreement. Obviously, that did not take place. So before we dive into the side-by-side agreement, which I assume is why everybody is tuned in, how is your holiday? And did you do anything besides just constantly refreshing DOECD website to see if the side-by-side agreement was-- The refreshing was a real thing. I'm sure it was a real thing for some listeners, too. For many of us. Yes, 100%. But no, good holiday. Otherwise, stayed pretty local. It was able to unplug a little bit, which is a good thing because we've had to hit the ground running. We certainly did. And I did the same thing. I was in St. Louis and didn't travel at all. During my holidays, the last thing I want to do is get on a plane, given all my travel. So it was very nice. During Christmas day in St. Louis, it was like 65 degrees. I'm going to be able to do the Celsius translation for that, but that's warm. Very warm. Very unusual. I'm usually warm. But it was very nice holiday. But then Monday, January 5, 2026 at 7am Eastern time. And I was still in the Midwest at Central Time. 6am, phone blows up. The OECD released its so-called side-by-side package that included a simplified ETR safe harbor, the one-year extension of the transitional CBCR safe harbor, the substance-based tax incentives, and I think most importantly, particularly for US multinationals, the side-by-side system. And we're going to unpack some of that on the podcast. But maybe before we get into some of those details, Beth, it was just a few weeks ago, in England, Estonia, Czech Republic, China had all expressed concerns in Estonia very publicly, with a letter to the EU. How did we get here? How did this get resolved to be able to arguably meet the deadline or at least meet the deadline before Congress came back to session? Yeah, it's a great question. I mean, I think observers of this process have typically felt that everyone's political incentives were aligned to get here. It was just a matter of how do we convince the folks who want to take a shot at using some political leverage? I don't mean that in a bad way. To get what they need out of the agreement, what was going to happen, it usually doesn't happen until the very end, and then people really have to express their concerns. I think that's what we saw with Poland, Estonia, Hungary, and China. Now, some of those concerns, Estonia's concerns in particular, I think we saw play out in the press were kind of resolved through dialogue with the European Commission. Others, you know, you could see a world where they were discussing what was submitted to the inclusive framework for approval. They were made comfortable with what the inclusive framework was putting out, because at the end of the day, you know, these documents, even though they do have binding force of law and some jurisdictions automatically, not so in the majority of jurisdictions. So, there's a lot of play in the joints here still. I know we're going to talk about that. But I think at the end of the day, when I would guess, if countries looked at what does this look like with the US and the system, or what does this look like without the US and the system, as long as the door is open for others to join, this is probably our best shot to get some medium-term stability in this base. Yeah. And, you know, I understand, particularly, Estonia's letter to the EU, and I mean, frankly, even Germany's had similar complaints that the cost of administration is going to be more than the actual any top-up tax that is due. And, you know, we've heard a lot about those issues. I mean, frankly, it feels a little late to be raising some of these at this point, after all of the EU member states had agreed to the directive, but certainly have some sympathy for those countries. I think the big wild card was China. And I do want to remind listeners that we talk about a lot about the inclusive framework and that you need to have consensus. But to remind folks, consensus really means unanimous consent, right? Yes. unanimous requirements. All of those countries as part of the inclusive framework needed to agree to the side-by-side package. You know, I feel like China kind of came in late in the game, at least publicly, what we saw and reported. But I haven't seen it. I mean, any press reports or any insight on, you know, China who hadn't implemented these rules was concerned, but it wasn't based on what I saw on the side-by-side package. It wasn't certain that maybe if something was done to potentially mitigate or react to China's requests. You know, I was really looking for that too, because it was, I, the wild card thing is so appropriate. I think that's an appropriate way to describe it. You know, there is, you know, you can see in the substance-based tax incentives portion, you know, we talked about this little bit in December, how the G7 statement mentions credits. We're not talking about incentives, including super-deductions. That was included in the G20 statement as well. So there was a move in China's direction, you know, they famously have a super-deduction for R&D. So that's, that is something that you could point to. I mean, it was already agreed at the G20, so you could query whether on the margins, it was a big win. I think also, and this might not only apply to China, but other countries as well, it does, we don't really have that grade of a view into some countries, kind of domestic politics, or at least as US practitioners, we tend to be quite US-centric. For sure. I think, I think- Try not to. I know. It's difficult. It's difficult because you know your clients asked you about US stuff, you know, you know, like, but broadening things out, I think that really being able to say domestically, the door has been left open if we want to make a strategic decision to move in the side-by-side direction, I think that actually carries a lot of weight with a lot of jurisdictions. Having the option, that's one of the things that really struck me about the document, the side-by-side document, how there are even procedures laid out affirmatively to say this is how you join, this is how we will do it, admittedly, you know, just a paragraph or two, vague. We need to, we could talk about that more. But I think in terms of getting domestic approval and creating that flexibility, that struck me as important. So a little bit of that might be going on here. Yeah, and it's very interesting to me if other countries may look at the US system for those countries that haven't enacted pillar two and sort of take stock and say, well, do we need to pick between one of these two now? Do we have a campty and equivalent of the guilty? And, you know, the US system is complicated. Yes, sir. As a very complicated, and I'm not even sure which one is more or less complicated. They're both incredibly, incredibly complicated. But it will be interesting to see if some of those countries that have not enacted, if they maybe choose to do more of a US-type regime, and then go through that process. Because the only country that is qualifying, at least according to the OECD at this point, is the US, and no surprise. Yes. But we do have the central record pulled up, and we can refresh it as we go on. As of this recording. Yes. Okay. And then what was the US Congress's reaction? And so they came out very shortly after, but what did Congress say? And I think we had from both chambers, who were represented in the statement. Both chambers on the majority side. Sir Chairman Crapo and Chairman Speth basically said, basically, welcome the result. It said, we need to focus on implementation collectively now, or more to the point kind of you, inclusive framework members, particularly those who have UTPRs on the book, need to focus on this. That signal was not surprising to me. They invoked $8.99, said if this doesn't move along appropriately, we're not taking $8.99 off the table. Again, as expected, I think what I'm taking away from those statements, though, is, that Treasury has continued to work with Congress on this. Those statements came out immediately. They were quite frankly predictable in what they said. And so I think it was very, it was a coordinated effort. I think it was a helpful effort to know where Congress is, 100%. But I think you could hear rumblings around the edges about, well, is Congress going to accept this agreement, does this constrain Congress too much? At least based on those statements, it seems like Congress is okay with where this went. Right. And I don't want the point that you raised to, we're going to cover this throughout the podcast that these is just an effectively administrative guidance, right? The side by side package, this has to be enacted into local countries' legislation. Where we sit here today, Beth, in January 7th, we have 58 countries that have enacted pillar two where there's two on the horizon, your way, and Montenegro, so we're going to be at 60. And all a small fraction, just a handful have taken the ambulatory approach that effectively allows this administrative guidance to automatically be incorporated into domestic law. Not the case. I don't think any of the EU jurisdictions are some of the major economies. And so, very important and Congress was laser focused on this. Hey, this is great, but countries we need you to enact this or potentially face the wrath of another retaliatory tax or something similar to 890, 899. Yes, it's a really great point. It bears emphasizing over and over again, this is not self-executing. It is a political agreement, only gets incorporated automatically into law and a handful of jurisdictions, so we're going to have to watch out for how this gets adopted going forward. Yeah, and this is really important for particularly for public U.S. multinational from an accounting perspective. And frankly, with all of this, including the substance-based tax incentives, with IFRS, as well as GAAP generally look at enacted law. And so, as companies are thinking about and heading into Q1 provision, I'm saying this is they're all cramming to finish their year end, right? But as they finish 2025, at least for the calendar year filers, and start to move to 2026, they're going to need to look and say, well, what countries do they operate? Which of these have enacted the side-by-side agreement? It's relevant for both in-bounds, as you think about some of the R&D, the research in development credits, and the substance-based tax incentive. Obviously, incredibly relevant for U.S. parented groups that potentially have a top-up tax on the U.S. they mean if local countries haven't, or if the subsidiary countries have not enacted the side-by-side, at the end of Q1, Q2, depending on how long this takes, that they could potentially have to provide for a top-up tax this year, even though no actual tax may be due, assuming all 60 of these countries bring this in. I will point out, because I don't want to bury this one too far in the podcast, that there was a footnote in the report, footnote 3. It says that each U.T. PR jurisdiction, including those that have enacted the side-by-side safe harbor, will be taken into account in the formula set out in the global model rules for the allocation of the U.T. PR top-up tax. In other words, if there's just one country, for example, that doesn't get this enacted, that one country doesn't get all of the U.T. PR top-up tax, it only gets its proportion at share. Which I think is consistent with how the rules were before this even side-by-side agreement came out. That they've reduced it to, they treated as being zero, also helped support that. But that is, I think, favorable and good for U.S. policymakers to understand, and particularly for U.S. taxpayers to know that if there is a country that hasn't enacted and they still need to provide, that it will be the pro-route apportion. Still could be a big number, though. It still could be, but great over the clarity. There was always one footnote in these big agreements that it's like, "This is the footnote we need to mention." Right. And it's this one that's going around. Which, the question is whether it should have been the footnote at all. But that's right. I found it. I found it. Yes. So, what are some of your just the big picture key takeaways from this agreement? So, for me, you know, and this is, I might be biased a little bit coming from the government side, but I do want kind of listeners to understand what a huge lift this is, as someone who has lived through these negotiations kind of on the congressional side, on the executive branch side. I mean, I think the pivot was a really hard one, like hard right turn. We're going to do this a little bit differently. After the 27 agreement. Yeah. Yeah. We're going to do this differently. But even with the January 20 executive order, you know, it was just a completely different landscape, completely different world. And I don't mean this just from the US perspective. The US, I think, and this is another big takeaway. The US, I think, got mostly what it wanted in this. I think there are some places we could talk about where it didn't. But this, it was a huge lift. I think all of the delegations, regardless of how you feel about some of the policy choices, the fact that they got it done at all, I think is really impressive and should not go on note. They had a year and they basically hit that year. I agree. And I mean, Kudos to the OECD and John Mitchell, who I'd love to get onto the podcast at some point if he's listening to, because I would love to hear about how this got across the finish line and frankly what, their holidays for him and his team. We're alike as well as all the delegates that had to agree to this. But I'm certainly credit goes to everybody who we know worked very, very hard to get this done. Yeah, so that's, I mean, that's one thing. The other thing that really struck me when I was looking at the agreement, like I said, I think the US got most of what it wanted. There are some things that popped to mind where it's like, I know this wasn't the US starting position and a lot of like some compromises were made here. For instance, on the inbound side, I think the initial US position kind of, you know, in trying to interpret faithfully the executive order was any US operation should be subject to pillar two. Like full stop. Full stop. Full stop. That was the initial position. I think other countries quite smartly and fairly said, well, you know, I want to have the tax sovereignty to tax my companies that are headquartered in my jurisdiction. And so you see a bit of a compromise there where, you know, it's only US parent and groups who qualify for the side by side right now, who are located in the jurisdiction in the United States. But you also see kind of these changes, like you said, the substance based tax incentives to kind of accommodate for some of the inbound concerns. So that's one thing that's struck me as a different, as a take away, the US didn't exactly get what it wanted there. And the other thing that really struck me was the emphasis on QDMTTs, which I think everyone should be paying attention to in terms of kind of like a future proofing how is this going to develop. Yeah. It really puts a focus on what other countries care about now that pillar two has become a bit of an intra European, not totally, but kind of that type of a competition conversation. The insistence on say the stock take provisions that we need to look at what happens to QDMTTs, all of that I think speaks to kind of like where these future work streams are going, not exactly. I know we want to focus on practical stuff here, but just in terms of like looking ahead, it came through very clearly that a lot of countries cared about that. I suspect there are EU countries. And finally, I think that one of the last takeaways I have is just how delicate this balance will be in terms of keeping this stability vis-à-vis kind of looking ahead to next steps in what other countries do. And I think this feeds into the, I think this feeds into some practical advice, which is we will need to continue to monitor this, not just in terms of how countries are led just slating. I think that's really important because that will impact filing obligations, maybe liabilities, like you said, to the footnote. But I also think that it will, we will get some insight into how all of this is going to hang together in a way that was different from what we were used to, which is is the US going to be in it or not. Now that we've crossed that threshold, it might not have been a threshold that people wanted to cross, but we're here. And so now the questions we have to ask are a little bit different. Right. And I'm going to add to that and then also provide a couple of my takeaways. In addition to see how various jurisdictions make policy decisions with QDMTTs and with the pillar of two rules in general, it's going to be very interesting to see how the market reacts and how taxpayers react. There was a lot of noise in the system about, well, does this make the US system significantly more competitive than the European system? And if you remember, I think I mentioned on our prior podcast, I had Ted Fowler from Proctor Gamble, senior VP. I mean, their text, their US text return is over 15,000 pages. And this whole idea of this competitiveness, you know, the market, we'll see, right? I mean, we saw up 20 years ago in the early AOTS. I'm still not really comfortable with saying that. But where there was a lot of inversions, right? Where we saw a lot of US multinationals invert out out of the US. And then obviously law changes occurred to really stop that. And then the corporate out went down to 21. And with the Tech Scuts and Jobs Act, we've seen very little of that. I suspect that we'll see very little of European multinationals inverting into the US. But time will tell, right? And I assume that is part of this stock take that they say in 2029, just not for the QDMTTs. But overall, how is pillar two working? But I'm very interested in what the stock take by 2029 means. And I don't know if you had any additional thoughts on that. So I did. Thank you for teeing this up because, you know, first I'll mention the, um, the BEPS1 stock take, which has happened. And I'm not sure people were aware necessarily that that came out of the OECD. But I mean, when you see stock take and you start thinking, that's not a word, it really does have some kind of precedent around it at the OECD. I did have to google it. It's funny because it's like, is that a word? Yes. It is a word. It is a word. And it is defined as, you know, determining that I can't, I should have written down the definition. But it is a word. Yes. It's a word. And in fact, it has a precedent, which is, as we know, very important at the OECD. It is a body that relies heavily on what we have agreed you before by consensus. And so, you know, I think for folks asking, well, what's really the model of the stock take, you know, how does this work? Can look to how that process kind of worked out. That's sort of like content, but what was produced. I think on the stock take two, just kind of a couple more like political leaning points. One of the questions I've been getting a lot since I joined PWC is, you know, around like stability. How stable is this going to be with, you know, what if the Democratic Party takes control? What if the Republicans are still there? And, you know, how are we going to engage with the OECD on this in 2029, you know, after the next presidential election again? At the end of the day, I think it's important to remember that regardless of what the data that OECD collects, when reports like this are issued by the inclusive framework, it is a consensus based body. So as long as the US is at the table, it will be able to shape the stock take first and foremost. I'm glad you brought up the process point on the OECD because it is really important to remember that. Just because information is submitted to the OECD doesn't mean the Secretary gets to unilaterally do whatever it wants with that. The reports need to be approved by the member countries. Also, you know, I get the sense, even though three years from now, we can, you know, look back at this and say that I'm totally wrong. Hopefully nobody does that. You never know. There's like, they all probably do it. So on the democratic side, I think, you know, people are nervous like, what if there's a democratic administration? Sure. Like at this point, what the OECD has said is the US system, barring any changes, is as robust as the pillar to system. I think it would be really a difficult political cell for the Democratic Party to say, you know, even though the world's not the total world, but even though in the inclusive framework, the like major economies and a bunch of other countries have said, this is, these systems are equally robust. But, you know, to go in and say, well, actually, no, we need to be more like pillar two and we need to get the UTPRs back and play. I think that would be a really heavy political lift. I really, yeah, I think it really would. So I'm not taking anything like, say, country by country off the table. There's always revenue raising stuff like raising the corporate rate, but I think in terms of, for the best shot at stability, I think this, for me, this was the way to do it. And I'm not saying it's going to be completely stable, but I think that the stock take was the way it is structured, the timing and just by dent of the procedures at the inclusive framework, you know, I think that the delegates have landed in a good place in that regard. So the other takeaway that I wanted to mention is that I think many US taxpayers were optimistic that this side by side agreement was just going to turn off pillar two for them in its entirety. And obviously, you already raised the point. QDMTTs are obviously still in play. Yes. I would say even more than in play are now really the foundational element of this entire pillar to regime and pillar to policy. Such a good point. Right. And with like the U.T. PR was, I think, designed to be that foundation and it's really the QDMTT, which didn't even exist as part of the initial models, which we talked about on the last podcast, is now really, really important. And so US MNCs are still going to be on the hook for QDMTTs, just like any other in scope taxpayers. And then for US MNCs, for 24 and 25, full pillar to compliance. Yes. So obviously, the US base is not at risk because the U.T. PR safe harbor was there. And then there's also potentially at risk that US MNCs could have to comply in 2026, depending when all this rules get enacted. But in a minimum, US multinationals that were still in either the denial or anger phase of grief with respect to pillar two, now need to get ready, particularly for calendar year filers for that June 30th, 2026. I agree. And there are already a number of countries that we had that were a requirement where filing was due in 2025. So very important for taxpayers and the lift is a big one. As for long time listeners of the podcast, no, there are a lot of data challenges and other complexities. All right. So let's dive into a little bit of the details. Yes. I'm not going to torture you or our listeners at this point with details on the simplified ETR safe harbor. Very good. We're going to bring our friend Steve Kohart on to do that. But any just general comments on the simplified ETR, I will caveat that our colleague Will Morris did a word search. I didn't validate this, but I trust that his word search abilities are robust. 89 times OECD mentioned the word simplification as part of the ETR simplification, which I was kind of left the question, who are they trying to convince? Did you have any big picture or themes from the simplified ETR safe harbor? I mean, I noticed that it was more streamlined than before, which I think should be welcome from previous versions. So I think-- No, not too cynical. No, no, no. But I think also, to your point, it struck me as I actually expected, and this is maybe, if you're cynical, maybe I'm naive, I expected it to be even more streamlined. And the reason I did was because there is a tax compliance element to tax competition. And we know that, you know, based on-- it's just not that the stocktake, the European commission is said, in addition to the stocktake, we are going to undertake a study of your EU competitiveness in 2029 parallel to the stocktake. And so I look at that and just like conceptually big picture was thinking, both when I was at Treasury and here when we were waiting for this, it is maybe in the best interest for the simplified ETR safe harbor to become quite simplified. Because even though US companies still need to follow GIR, some of these compliance issues to deal with, and I don't want to minimize those, going forward, it's a lot easier when your top of tax is deemed to be zero or presumably it will be, I guess we really haven't seen the reporting document. But exactly the reporting is going to look like, you know, compared to the simplified ETR safe harbor. And so I kind of expected in just in terms of leveling out compliance competition that things would get a little bit more streamlined, perhaps like, you know, a little bit more robustly, maybe I'll use your word more streamlined. Right. Then they did. But those dynamics didn't play out exactly how I expected. You know, it's, but I think it was, you know, WP 11 and the steering group and the inclusive framework, that struck that balance. I wasn't in the room. So if that's where they decided to go, I guess the balance towards no, we need to make sure like to be more precise on this is the thing that won the day. So that's my long winded, but still global observation. Okay. All right. So let's move into the actual side by side safe, safe harbor. Maybe you could talk a little bit about what are the requirements to be able to meet this. We already kind of spoiled the fact that the US is the, is the only jurisdiction at this point that was put on the central registry as a good jurisdiction. Yes. But they did create a framework for other jurisdictions that may consider presumably a similar type of regime to the US and a process. So tell us a little bit about that. So this is, so you can tell, but again, no bearing the lead. I did just refresh the central record. I'm not expecting another country to pop up, but it has not that United States is still the only jurisdiction. So to qualify, you need to have an eligible domestic, eligible worldwide system to components. So eligible domestic 20% nominal CIT, the taking to account certain adjustments and preferences. You need to have a financial statement based minimum tax with a 15% nominal rate. So think QDMTTs, but also think Camtie. And there needs to, there's kind of catch all language that there needs to be no material risk of an under 15% tax for US, let's just say US, but it could be any side by side jurisdiction. US M&E is on the overall profits of their domestic operations. So this, to me, isn't lined with kind of the overall goals of pillar two and the BAPS work in general, but it also pretty tightly describes the US system and QDMTTs. I would again mention that QDMTTs are privileged throughout these definitions. On the worldwide side, the requirements are to be eligible. The country has to have a comprehensive regime with a broad base, base excuse me, that's applicable to all residents, on foreign income, that includes active passive, regardless of distribution, so no deferrals here. High tax exclusions are okay, so exclusions are okay, so long as they're consistent with the policy objectives of pillar two of BAPS. The worldwide system also has to unilaterally address BAPS measures to think kind of like the guilty beat concepts we have in US law. And again, we have this no material risk regarding minimum taxation of 15% on overall profits of foreign operations. So those are the components. The document goes into kind of how some things the OECD can advise as other countries to use to assess those components, how it will assess the components, but that is the just on the requirements. Right, so in January the rules read as that it needs to be enacted systems prior to January 1st, 2026, which is presumably why the US is already on there. But one of the things that I thought was interesting is that there's kind of two different elements. There's the side by side safe harbor, which requires you to be both have an eligible domestic tax regime and an eligible worldwide tax regime. I think those rules are intended to turn off the income inclusion rule and the UTPR for the subsidiaries of the UPE. And then there's also the UPE safe harbor in there that's different from the side by side safe harbor that requires an eligible domestic tax system that you described. And then that deems the UPE jurisdiction top up to be zero. Yes. And so presumably that may be for some of the other high tax countries. I know India had publicly said that they didn't want the UPE to apply. China has made public comments. I think Brazil has made public comments so it'll be interesting to see if any of those jurisdictions or other jurisdictions may fall within the UPE safe harbor. Yes. That is, you know, we can think of it as a more robust replacement of the UTPR safe harbor. And it's for pre-existing regimes. So this one is not open. The side by side is good point. Open. This is for pre-existing regimes. So. And again, I did just, I did just refresh the center record. The UPE record doesn't list any countries yet for this. But I totally agree with your speculation there that we were hearing a lot of rumors that maybe there were some countries out there that would qualify for a certain safe harbor if things were written in general terms. The UPE safe harbor seems to be that likely safe harbor. We'll just have to wait to see you. To the place. Yeah. And then for companies that want to try to meet the side by side safe harbor, there I think review can be sought. I think that's said in 20s, 27 or 2028. Yes. To be able to do that review. And again, I think it will be interesting to see if any of those countries that haven't enacted pillar to may adopt a U.S. type guilty regime. But be careful what you sign up for countries that are considering that. It's so true when you think of being, it's talk about being U.S. centric. But when I think of a, being in a U.S. advisor position, it's like, would I ever advise someone to adopt the U.S. system like Point Plank? I don't know if I don't want to. If I was going blank slate. Send them the regulation. In addition to the statutory language. That I think is always surprising to people. It's like, this is all of your tax laws. Yes. Well, just the primary, like there's all this other like case law. I mean, it's complicated. It's complicated. It's complicated. So the other thing that they mentioned about no impact to QDMTT's side by side does not impact QDMTT's. So as we already mentioned, U.S. MNC's, the rest of the world still subject to the QDMT's. But then they also mentioned some specifics on information reporting. Yes. Right. So the election needs to be added to section one of the Globe Information Return. I think this is a very important point because I think a lot of the U.S. taxpayers were hoping that the compliance would just go away. Right. So they're definitely going to have to do QDMTT's. And we know that they are going to have to file a Globe Information Return. They said they're going to add to the elections to section one of the Globe Information Return. What I was in clear is, well, what other sections are still going to be relevant for U.S. multinationals that they may need to fill out part of the Globe Information Return. I'll also remind from a practical perspective, a number of countries QDMTT's are based on the Globe Information Return. Very good. And so that U.S. MNC's may not, they may be off the hook from formally having to do the Globe Information Return other than electing the side by side, but that may be relevant for purposes of QDMTT's. And again, the OECD was also explicit that this does not impact compliance reporting requirements for 24 and 25. Yes. Which I think, you know, it's a point that we have been making even as we were waiting for the agreement to come out. But I think it is good to reemphasize and remove all doubt on that point in the document. All right. So let's move on to the Substance-Based Tax Incentives and with the sort of the new definition, a new type of tax incentive that they now call Qualified Tax Incentives. So there are a lot of new acronyms that are in here, including, I should have asked this earlier, the concept that the OECD defined the term Global Minimum Tax GMT. That was the first time I've seen the OECD use that term. And maybe I've missed that before, but that they've adopted, because I think many of us have been calling it the Global Minimum Tax, the GMT for a long time. But I will note in kind of the introductory words, actually define it and start referring to pillar two. Yeah, to do. I'm wondering if I need to start calling it pillar two and start calling it the GMT. That's going to be hard for me to change. It's going to be, it's kind of like the guilty and like, nifty necktie thing. It's going to be hard. I'm with you. But the acronyms are a fun one, the other one I like to mention, speaking of acronyms, UTPR is technically not under tax profits rule. This has never really been defined. I don't think so. We call it that. Everybody calls it that anyway. Okay. So QTI, so qualifying tax incentives. So maybe at a high level, how do these work and we can dive in a little bit to that. Yeah. So basically what this is saying, which is actually, you know, I will say this, like back when I was working at Treasury in the Biden administration, there was a real push to get something like this done. You know, you and I discussed that. But I will say that where they've ended has been slightly different from where I think at least the Biden administration started. And that basically we now have a rule that says the top of tax that is attributive to qualified tax incentives is zero. So it's kind of, it's not exactly the same as say the treatment of a qualified refundable tax credit, which was kind of always the goal, I think of kind of talking about how to level the playing field or level the playing field, I guess on these tax incentives. So you basically take what the difference between what the top of tax would have been, had you elected for the QTI safe harbor versus not. And a substance based cap applies to how much you're meant to take into account under the QTI safe harbor. And that is the long and the short of it. There are a lot of details in here though. And a lot of examples too. Yeah. And we're not going to dive into those in the interest of time. But I think one of the really important things is how it impacts the calculation vis-a-vis how qualified refundable tax credits and the market transferable tax credits. So explain how these QTIs differ from the QRTCs and the MTTCs. Yeah. So basically with the QRTCs and the MTTCs, the favorable treatment that we were all talking about and kind of for like can we get this for some US tax credits too, was you just, it's counts as income so you add it back into the denominator when you're calculating your ETR basically. Now what the OECD is asking for with the QTIs is to say, okay, we're going to remove this from the top of tax calculation period. So do this kind of almost alternative minimum tax calculation and kind of take that income away which is kind of is a much different concept. Right. Yeah. And so taxpayers and they explicitly say that the taxpayers can elect, they can take the QRTCs and the MTTCs that otherwise qualify as these QTIs and can elect, they're treat them as QTIs. So therefore they get added back to the numerator in your calculation and you do not need to reduce the denominator by that. So this could be very favorable. So elections, you know, as a tax advisor are always great, right? Because it gives optionality. The downside is that what you have to do with the math for both to figure out which one makes the most sense. Which one works? Presumably the QTIs are going to be better and then they even included some detailed rules on how you would pro rate or how you would proportionally divide between those two. So this is very important for our inbound listeners. I think a lot of them are fascinated in the side by side agreement. But this is very important for investment into the U.S. as well as frankly investment anywhere where there have been incentives. There were also something that they introduced called the production based tax incentives and maybe a couple minutes on that. Yeah. So production based is at we were, you know, one, one kind of the political dialogue around the started was there was a thinking, okay, you know, I can really easily measure something off expenditures. But so what QTIs have done is they've said not just expenditure based credits but also production based credits. Expenditure based is what it sounds like, calculating and qualifying expenditures in a jurisdiction. The document mentions kind of research and development activities, kind of environmental related stuff explicitly and it must be substance based, hence the cap which we can talk about. Production based is kind of a newer concept but I'm not surprised that it's in there because a lot of domestic investments, even just, you know, taking from the U.S. side, think of the energy credits for instance, the difference between the PTCs and the ITCs, the production tax credits and the investment tax credits. You can invest in an energy facility and calculate your tax credit based on that investment or you can produce green energy, clean energy and have that tax credit calculated on units of production. That is what the production based tax credit is basically capturing. It's saying you don't just have to look at expenditures in terms of substance. If something is produced in jurisdiction, we also consider that a substitute for an acceptable substitute for expenditure based credits. So, there are a couple of restrictions here. It needs to be based on the volume, not the value of production and it only applies to tangible property, including energy production and certain extraction activities. So it's cabinetating a little bit but I almost, maybe this is just the baseline I'm coming from, I almost think of it as an expansion of the concept to make sure that the broadest range of credits that have substance, or I should say incentives that really have substance getting here. And then you would mention the cap. And so, talk about, I think 5.5%. That's right. So this will be familiar for everyone who has to do pillar two calculations. It's based on the substance-based income exclusion, which is very much kind of, it is exactly where I would have gone to if I was kind of negotiating at the OECD. Everyone agreed to that already. So use the existing technology. So you've got, again, you've got to have substance the way they measure the substance here is method one. You have the greater of 5.5% of payroll or of depreciation, depletion of eligible tangible assets, which is a term of art that is defined in the administrative guidance and the model rules. Method two, what taxpayers must elect, is you can also use as a cap the 1% carrying value of the eligible tangible assets. The one thing I would mention here that I think some commentators have pointed out is the substance-based caps, they're understandably there as guardrails. The consequences for developing countries still needs to play out here. Because on the one hand, we're not just talking, we're fundable tax credits, which very wealthy countries can offer, but not many others. Now we've expanded to super-directions, which is a more flexible incentive to offer. At the same time, when you have these payroll caps in here to really prove the substance, it puts some restrictions on this that I think it will be interesting to see how this plays out in terms of encouraging direct investment in developing economies. I have the same observation. So what does this mean for US incentives for in-bounds? Because I think this is fascinating for US multinationals, the QTIs, relevant obviously to the extent that US MNCs are operating in a jurisdiction with the QDMTT and thinking about incentives. How does that impact the QDMTTs? But now with the UP, the side-by-side, safe harbor, the US base for the MNCs isn't really into play as an app play, but for inbound investment into the US, this is very, very important because we saw we've seen a lot of inbound companies that take the R&D that have significant substance here that's rates were below 15%. So what does this largely mean for inbound investment into the US specifically? It is incredibly important for inbound investment in the US. It provides more flexibility for favorable treatment, basically. And so this is something that I mentioned at the top, the kind of inbound position that the US went in with. This is the compromised position. And given, depending on the profiles of the inbound companies, it could be really impactful in terms of what their pillar-to-top-up tax would be, at least such a crude over-to-US investments. I think this, I again come from the US delegation opinion, so I am admitting my bias straight up, but I really think this is really, really important, not just for the US. I mean, we knew that like the US had been carrying the torch on this for a while, but it's a really, it's a good expansion. I agree. Yeah. Because if like there needs to be the acknowledgement that come trees are still going to be for foreign direct investment, let's have a structured and fair way that is substance-based to allow countries to continue to do that. And I think they struck a good balance because for those countries that were nervous about, okay, what about like returns to income? We can't do that. You know, there is a discussion of related benefits and that work continuing at the OECD. And what that basically means is the OECD is going to continue to look at, this is why we need to keep monitoring, continuing to look at, you know, how best to put guardrails around related benefits where you can't get around the pillar of the rules by just returning the income in another way. You can't get, you can't get this treatment, say, if you have a special agreement with the government that's just between the M&E group and the government. Exactly. There's, there's, and I think, you know, those are vaguely defined, so there's going to be play in the joints there, but it's a balance and that's where the balance really lies. Yeah. So the last piece in the side by side package was a transitional CBCR Safe Harbor extension, not a ton there, but it does extend the transitional Safe Harbor for an additional year. So for fiscal years, beginning on or after, 1231, 2027. But the rate is at 17%. So I think that was the big question. I think this is very welcome for taxpayers knowing that they can continue to apply the transitional Safe Harbor. They also provide some flexibility that you can choose between the transitional Safe Harbor and the Simplify DTR. I'm guessing, you know, most companies are going to go with the transitional Safe Harbor. Maybe they'll do the math if they don't meet it, but I'm not, I don't think that's going to be that, that comment of an occurrence. But maybe we'll close math with urgent actions for taxpayers. And I'm going to start and see if you have anything to add. But the first, and I've already mentioned this, 2024 compliance. For all multinationals that are in scope greater than 750 million Euro, top line revenue operating in any of the countries that have implemented these rules, you are going to have to comply. And from the US taxpayers listening to this, it is time to start if you haven't started already for your 2024 compliance. And also thinking about 2025, ideally, 2026 will be much more simplified without the DTR and the U.T.P.R. applying to foreign subs. But getting going on compliance and then the other one that I would mention, which I mentioned earlier, is thinking through for those public companies, the accounting implications on enacted law. This is relevant for both USMNCs as well as non-USMNCs, most of the accounting standards around the globe rely on enacted law. You had mentioned there's only a handful of jurisdictions that have this ambulatory approach that already included the administrative guidance. So understanding whether that has been enacted and what the consequences are as you get through your measurement dates in those quarters is very important. Yes, 100%. Anything else from. Yeah, I guess I would add because I think it's something that needs to be washed closely. It ties in with the kind of accounting consequences, but how and when countries are going to legislate this. So Congress is going to be looking at it based on those statements. And also I think it's very worth a follow-up for taxpayers to look at this stuff just because it can have major implications depending on what jurisdiction you're located in or what you're doing business. And I will encourage listeners to follow this, all these developments on PWCs, pillar two country tracker. It's available for free. On the website, we will be specifically tracking and highlighting those countries when they bring them into law, the enactment of this side by side agreement. So you can just put that in your search engine, the PWC pillar two country tracker, and we'll be tracking all of that as those developments occur. I will be tracking very closely and also obsessively refreshing the central record at OECD. So I will continue to do that on behalf of all of the listeners here. All right. Thank you very much, Beth. This was great. Glad we actually were able to talk about the side by side agreement and thank you again for coming on. Thank you for having me. This is a great chat. Really appreciate it and happy new year. So thanks for tuning in to this week's episode of Cross-Border Tax Talks. Thank you, Beth Bell, Principal in PWCs, Washington National Tax Services Policy Group. I'm Doug McConey, PWCs International Tax Services Leader. Stay tuned for another exciting edition of the Cross-Border Tax Talks podcast. This podcast is brought to you by PWC, all rights reserved. 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