Navigating Pillar Two: Side-by-Side, Safe Harbors and the Future of Global Tax Cooperation

Episode Summary

Pillar Two is the OECD’s global tax reform designed to ensure multinationals pay at least 15% tax on their foreign earnings, no matter where they operate. Its Side-by-Side (SbS) framework treats the US tax system as sufficiently compliant. To unpack what this all means for companies on both sides of the Atlantic, Pascal Saint-Amans — former director of the OECD’s Centre for Tax Policy and Administration — sits down with hosts David Farhat and Stefane Victor and guest co-hosts Loren Ponds and Patrick O’Gara. Tune in for the panel’s insights about Side-by-Side’s safe harbor, the role of Qualified Domestic Minimum Top-Up Taxes, and European anxieties over tax competition.

Key Points

• Four Components: Loren breaks down the anatomy of Side-by-Side, “a shorthand for tranches of administrative guidance.” The framework is broadly applicable in some respects but also has some rules that apply solely to US-headquartered multinationals.
• The Safe Harbor: Side-by-Side effectively returns the global tax framework to the co-existence model discussed around 2018–2019, treating the US tax system as sufficiently aligned with Pillar Two’s minimum tax spirit. As Pascal notes, the rates have changed — 15% globally, roughly 12.6% effectively in the US — but “is it that different? No.”
• Qualified Domestic Minimum Top-Up Taxes: The Side-by-Side agreement depends on the integrity and creditability of Qualified Domestic Minimum Top-Up Taxes, or QDMTTs. If QDMTTs are undermined — through conditionality, non-creditability, or related-benefit arrangements that return collected revenue — the deal collapses. “If it’s not creditable, nobody outside the EU will keep the QDMTT,” Pascal observes.
• “A Massive Win”: Side-by-Side reduces compliance complexity for US multinationals by removing the Pillar Two overlay from their GILTI and Subpart F obligations.”For US business, this is a massive win, isn’t it? Because it takes out the administrative complexity of operating US tax compliance, GILTI, Subpart F, with a Pillar Two overlay,” Patrick explains.
• Competitive Anxiety: European governments and businesses are watching whether Side-by-Side creates a meaningful competitive advantage for US multinationals or whether QDMTTs largely neutralize that concern.

   

Voiceover (00:02):
This is GILTI Conscience. Casual discussions on transfer pricing, tax treaties, and related topics, a podcast from Skadden that invites thought leaders and industry experts to discuss pressing transfer pricing issues, international tax reform efforts, and tax administration trends. We also dig into the innovative approaches companies are using to navigate the international tax environment and address the obligation everyone loves to hate. Now your hosts, Skadden partners, David Farhat and Nate Carden.

Stefane Victor (00:36):
My name is Stefane Victor. I’m joined by our host, David Farhat. Nate Carden and Eman Cuyler couldn’t join us today, but we are joined by guest co-hosts, Skadden Partners, Loren Ponds in the D.C. office, and Patrick O’Gara in the London office. Thank you both for joining us. We’re also joined by a guest, Pascal Saint-Amans. Pascal is the founder and CEO of the Saint-Amans Global Advisory and is an associate professor at HEC Paris. Previously, he was a director of the Centre for Tax Policy and Administration at the OECD playing a key role in the advancement of the OECD tax transparency agenda in the context of the G20. Today, we’ll be discussing Pillar Two and its interaction with Side-by-Side. David?

David Farhat (01:21):
Thank you so much for the intro, Stefane and Patrick and Pascal, really happy to have you guys here to talk about a very, very interesting topic. And, Loren, we appreciate you stepping in to help co-host with Nate not being here. So I guess we’ll first turn it over to you to give a little bit of background to how we got here, how we got to Side-by-Side. Yeah, we’ll start there.

Loren Ponds (01:42):
Sure. So for those who have been following the Pillar Two discourse, you would be forgiven for kind of thinking we are back where we started, kind of a full 180. The Side-by-Side agreement actually has four components. So Side-by-Side is a shorthand for tranches of administrative guidance that the inclusive framework put out that are somewhat kind of a mix, so broadly applicable on one hand and then some rules that apply solely to US headquartered multinationals on the other.

(02:12):
So the generally applicable rules relate to effective tax rate simplification, safe harbor measure, and ultimate parent entity, safe harbor, and also substance-based tax incentives safe harbor. The component that’s applicable solely to US-headquartered multinationals for now and what has generated great interest at least here in the US, has to do with the Side-by-Side safe harbor, which allows the full US taxation system to be considered as compliant with Pillar Two such that US-headquartered multinationals will not be subject to the IIR or UT regime because of some special features of rules that have been announced relating to both domestic and worldwide tax regimes that are in place in the US.

(03:03):
That’s not to say that other countries may not ultimately be able to also meet these guardrails and have their multinationals also be exempt, but for now the US is the only entity, only jurisdiction that satisfies those rules. And so when I say you might be forgiven for thinking we’ve come full circle. If we go back to circa 2018, 2019 right after TCJA had passed and GILTI had been enacted, there was a lot of talk of GILTI coexistence with the recognition that it was a min tax in the spirit of if not completely aligned to the letter of the Pillar Two regime, meaning that there was some kind of mechanism in place to ensure that multinationals paid a minimum level of tax on their foreign earnings.

(03:50):
Of course, since then we have enacted QDMTT, which is a domestic minimum tax, and the inclusive framework has gone through iterations to have recognition that GILTI is somewhat of a min tax most recently with the pushdown of GILTI taxes to CFCs to in an effort to make sure that their effective tax rate calculation was somewhat more aligned with the taxes that they were already paying. So kind of a long-winded way of saying good news for everyone and we’ll see there are some implementation issues that I’m sure we’ll get into. And of course, the reception of all of these rules outside of the US is also of great importance.

David Farhat (04:34):
So, Loren, the question I’ll have, and maybe this one isn’t for you, it’s probably more for Patrick and Pascal. You say good news. Is it really good news if there’s a legitimate question as to whether we’re back to where we started in 2018?

Loren Ponds (04:46):
Well, I mean sometimes the only way to get a place is to go through some stuff. So we had to go through the conversations, the negotiations, and our laws did change from 2018. So it was not just that we had a min tax on foreign earnings, active foreign earnings, and we had Subpart F all along, so immediate taxation of passive earnings as well.

David Farhat (05:15):
Pascal, is that the reception that folks are getting across the EU and really the inclusive framework that Side-by-Side is good news?

Pascal Saint-Amans (05:22):
Shall I give a try and Patrick will give another perspective, maybe an Irish perspective. So it depends. I would be US business, I’m not, you can hear my accent, I would say yeah, probably good news. I mean, you are safe-harbored from complexity and from additional tax. As a taxpayer you can only love that. And you’re right, in large parties back to coexistence system, at the time though where the OECD, I was there at the time, I know what I’m talking about, had in mind a global minimum tax of 12.5%. The main difference was the blending. But when people were thinking coexistence, I mean GILTI was at 10.5%, 12.5% globally, that was the idea. And Mnuchin, then the secretary for treasury said, “Hey, don’t bother us, do your Pillar Two if you wish, but don’t include the US.”

(06:15):
And we’re kind of there. I mean, the rates have changed, 15% but in the US 12.6%, something like that when you look at the effective rate. So is it that different? No. So you’re right, we went through the full circle and I guess American companies can be happy or relieved. Are the Europeans and the rest of the world? I mean we shouldn’t forget, there is a country north of the US which is called Canada, which is an independent country and they’re part of the game. You have Japan, you have Korea, you have many other countries, the UK which is no longer an EU member, which are part of the game. So is it good news for them or not? I think there are different perspectives there. I mean one is it is good news that the global minimum tax is still on the card, has not collapsed. And the Side-by-Side system is a way to say, “Well actually we keep the global minimum tax, we put a floor to tax competition.”

(07:17):
The good news is 1 47 countries, by the way, including China, agreed on that. Now, the negative part of that if I was a European business is, well, are we not as European giving the US businesses a competitive advantage? They will be able to blend low taxation in some countries with higher taxation, they will be able to play with different instruments, maybe the tax credits, and you have FDII that nobody’s talking about, but which is an interesting one to reduce the effective taxation. And therefore as a European, I would be worried that I’ve been put at a competitive disadvantage. Now, if I’m a government, because you have different perspectives, if you are a European government, you may have, one, the fear that your business is losing competitiveness, two, that you may be losing revenue. But I think the government’s understood that the global minimum tax is not about collecting immediate revenue because that will be for the low-tax countries through the QDMTT.

(08:20):
And what really matters in the long game, if you’re in the long game, is trying to reduce the tax competition, keeping the infrastructure and surviving maybe for a few more months until November where there may be an election in the US or later on where you may have changes and people more sympathetic to the approach. I think it’s no bad news, nobody will say this is terrible, even the strong supporters of it. I mean, except if you are in the tax justice network or so. But let’s talk about the government’s business and academics. Nobody I think is saying this is absolutely bad, but it’s not a great deal. And finally, speaking as a European I must say, “You know what? I mean, maybe Europe should be stronger from time to time to get deals respected, implemented, especially where in Europe you had the directive requiring unanimity and you could use that as at least a bargaining tool.”

(09:16):
Very last word, and many people don’t get it, US business does, QDMTTs are preserved and the excuse from the Europeans to get that deal done is to say, “Well, Pillar Two has been a success. Look at the number of QDMTTs.” And because of that, we are sure that Pillar Two is working and part of the deal is to secure the QDMTTs. So American businesses will first pay in the QDMTT country so we don’t get the revenue, but that stops the bleeding of corporate income tax. And the real test will be about this, will there be a pressure on countries to remove the QDMTTs including the Singapore, UAE, or the Irish. I mean, they’re part of Europe, so harder to move, but will there be pressure there to remove the QDMTT? And that’s going to be the test in the next two or three years.

David Farhat (10:08):
I think pivoting a little bit, because I want to stay on a lot of what you said, one of the biggest complaints at the start of this Pillar Two project was complexity. And I think I may have been one of those kind of pounding the table saying, “This is just more complex.” Does Side-by-Side add to that, take away from that, or are we still in the same boat from a complexity perspective? And again, Patrick, please chime in from the [inaudible 00:10:28] perspective as well.

Patrick J. O’Gara (10:29):
Yeah, I mean well certainly for US business this is a massive win, isn’t it? Because it takes out the administrative complexity of operating US tax compliance, GILTI, Subpart F, with a Pillar Two overlay. That’s an amazing win for US. And just to chime back in on the prior question from Loren that this has got to be viewed as success in terms of achieving tax stability for now. I wanted to add though maybe to harken back to the heady days of May and June 2025, which kind of set us on this proximate journey to Side-by-Side, which was the Section 899 of the One Big Beautiful Bill Act and the leverage that that created for this deal to be negotiated and agreed. I think from a European perspective, the fact that that is off the table, at least for now, must be viewed as a success. I think that is the quick pro quo that underlies all of this.

Loren Ponds (11:28):
I think that’s right. People are quick to query whether 899 will come back. I personally don’t see that happening anytime soon. I think that it served its purpose, but it’s very hard to make that threat twice with the same force. And there’s really, I don’t see the reason to bring it back because we, to your point, Patrick, achieved what we meant to achieve in the Pillar Two context with regard to recognition of the US system as being sufficiently robust to qualify as a minimum tax regime.

(12:02):
I wanted to go back to Pascal’s point about QDMTTs because it’s an important one. If you read the administrative guidance that came out a few weeks ago, it has been reiterated several times throughout the document the importance of QDMTTs, the privacy, they’re underpinning this entire agreement. And it made me think of when QDMTTs were first announced and I thought, “Well, if we’re going to go this route, why do we need these complex roles in the first place? If everyone can just move toward a QDMTT regime, it’s a lot simpler.” Under the Side-by-Side agreement, there also has to be creditability of QDMTTs in the US. And if you think back to the IRS notices that came out with regard to DPLs and DCLs a few years ago, and there was also discussion about Pillar Two and the creditability of the taxes under the regime, so IIRs would not be creditable to avoid circularity, UTPRs, the Treasury Department kind of reserved judgment on those, and then QDMTTs would be treated as creditable taxes.

(13:05):
So it should be understood that they would be creditable just because that’s part of the deal. I have heard folks from Treasury kind of say, “Well, we would apply our domestic rules when we’re looking at creditability.” Keeping in mind that foreign tax credit regs that were proposed at the time that the guidance came out have been somewhat withdrawn. So we’re in a little bit of what the Treasury says versus what the administrative guidance says. We’ll see, but they should be creditable under our agreement.

Pascal Saint-Amans (13:37):
If they are not, I’m not sure anything would change because the current transatlantic relationship is not based on trust but threats which will have long-term impact. I think everybody should be aware of that. But if they are not, I guess the Europeans will have to react one or another because it’s core to the agreement. Not sure what they will do. I mean, they are in a situation where only Greenland push them to react and say, “We may take some instruments,” but tax remains something sensitive in Europe. And if the QDMTTs are undermined and they would be, if it is not creditable, I mean if it’s not creditable, nobody outside the EU will keep the QDMTT and I don’t see even the EU being able to keep it and therefore the deal collapses.

(14:24):
If the deal collapses what happens? At least you have uncertainty. So that’s an important point you’re making, something to watch. The deal at least is, and that’s very clear, and you said in the OECD guidance, it’s very clear that not only QDMTTs must be creditable, but they have to be strengthened. The integrity of the QDMTT has to be watched. The OECD will soon start the peer review on the so-called related to make sure that money is not given back when it was collected through a QDMTT. So that’s going to be an interesting test to watch carefully in the coming months and years.

Patrick J. O’Gara (15:02):
I agree with that, Pascal. I mean, one thing that seems to have given the inclusive framework comfort to make this deal is the success of the QDMT regimes and the commitment forward-looking for inclusive framework members to stick with that. But you can see in the package that fear of backsliding, and I guess that fear of backsliding amongst what we might call the midshore jurisdictions that are seeking foreign direct investment and have historically sought that through tax competition. And we’ve all seen how that tax competition is evolving and changing from low-effective tax rates to refundable tax credits and other similar shaped incentives. But two of the strands in the paper where they seem to fear backsliding is around discriminatory or conditional QDMTs. And I guess what they’re foreseeing there is the risk that midshore jurisdictions won’t name them, but they may say, “Well, we’ll have a minimum tax for let’s say European headquartered groups, which will apply an IIR if we don’t tax it, we’ll turn it off the jurisdictions which don’t.”

(16:14):
And that gives them discriminatory or selective approach to depending on who’s investing and where, I guess paper posits two potential reactions to that. One is treating those taxes as not cover taxes, which is something that I kind of scratched my head about a little bit as to how that would work. And the second is withdrawing the qualified status from those domestic minimum top-up taxes, which again, I wasn’t quite sure how forceful a threat that would be where you are taxing the profit anyway for those groups. Pascal, just to throw it back to you maybe, what’s your reflection on this? Is this fear well-founded? And do you think that the further work that they’re contemplating that you referenced will stall that?

Pascal Saint-Amans (17:00):
I don’t know, but I fully concur with you on the fact that risks related to undermining QDMTs are clearly identified and you could find that in the G7 agreement back in June. It’s clearly part of the deal. Okay, we give you the Side-by-Side. If you, the US, you commit to make sure that the QDMTs are not undermined, how can you undermine the QDMT integrity, meaning you will find a way to give the money back and you have to help us, that was in the G7 agreement, you have to help us, you the US, us, the Europeans and the others, to make sure that we monitor and police that. And two, the conditionality, there was a debate, the conditionality was about at least one country, which I know well, Barbados, which said for the year, before the introduction of the UTPR, 2024 saying, “2024, why would we do exactly the same treatment for both US and other companies from other countries where actually the US companies will not be subject to a UTPR and therefore that doesn’t make any sense?”

(18:09):
So conditionality was introduced there and the OECD responded, “Okay, but only for one year and for this year because UTPR is not implemented.” But now you could say, well, if US is exempt from UTPR then you can do conditionality. But if you do conditionality, you remove the interest of having a QDMTT for most countries, you unbalance further, you unlevel the playing field between European and other companies and that’s why the Europeans cannot agree with that and I think that’s a red line. So we’ll have to watch and also we’ll have to watch the policing part from the OECD, I mean the peer monitoring, the peer review, peer monitoring of the implementation of the QDMTTs, and in particular the related benefits which can be refundable tax credits, which would just be a way to give the money back because they would be linked to the profit made and therefore the tax made or possibly subsidies here and there.

Stefane Victor (19:06):
Pascal, I have a question because you mentioned trust a little while ago. Do you think that Side-by-Side helps bridge the trust gap between US multinationals and European tax authorities or does it widen it?

Pascal Saint-Amans (19:21):
I don’t know. I think here we need to look at the big picture because we are not a business as usual and I don’t know what’s the vibe across the Atlantic. I’m based in Europe. I go sometimes to your places but not enough to-

Stefane Victor (19:33):
Vibes are low. Vibes are very low.

Pascal Saint-Amans (19:35):
Yeah, they’re low. And trust in Europe for America is extremely low. And I think it has an impact also on the perception of US business. Now, Europe is a bit in a mess as well. You have the rise of populism here and there and some of the populists are actually pretty, I mean tied to the Trump administration. So may sound paradoxical, but trust is low. Now, Side-by-Side tax authorities, it’s just part of this bigger picture. Does it help? I’m not sure it helps much. Does it undermine trust further? I don’t think so either. I mean, it’s so bad at the upper levels that it doesn’t make much of a difference.

David Farhat (20:17):
That being said, are we at risk of having a Side-by-Side-by-Side? And what I mean by that are will other folks try to jump ship and say, “Well, our tax system is robust enough. If you give this to the Americans, give it to us”?

Pascal Saint-Amans (20:30):
Of course. And that’s part of the deal so that you can ask for something similar until the ‘27, ‘28. And here you have the elephant in the room, which is China. We know that China doesn’t tax its companies as much as you could think in terms of nominal rate and there has always been a ratio there. So I mean, even India, I understand India in the conversation said, “Hey, we want to be protected as well. I’m not sure they need to be protected, I mean the tax like mad. So I’m not sure you have any risk of under-taxation in India.

(21:03):
Let me frame it otherwise. The US always got a special treatment and I remember, maybe I shouldn’t say it, but I remember doing a footnote against FATCA to say FATCA is equivalent to the CRS. Everybody understands what I’m talking about, Foreign Account Tax Compliance Act is equivalent to the Common Reporting System, which is about exchange of information. It is not because it’s not reciprocal. So the US always got some form of free pass. I would say it used to ask for it politely. 899 was not the polite way to ask for it in the broader context and that creates resentment.

Loren Ponds (21:44):
When you say competitive disadvantage, isn’t that presupposing that the QDMTT regime kind of falls apart? Because with QDMTTs, the competitive disadvantage might be the compliance burden that non-US multinationals have to bear. But in terms of tax dollars paid, it doesn’t seem to me like there’s necessarily a disadvantage there because US multinationals would still be subject to QDMTTs everywhere else, just-

Pascal Saint-Amans (22:12):
If you have a universal adoption of QDMTTs, you’re right. But not yet the case. I can name a few jurisdictions and countries which do not have a QDMTT and which may attract further profits. So yes, if there were universal adoption of QDMTT and full integrity, it would be right. But that is not yet the case. And what’s going to be interesting in which direction it goes. Europe is probably too weak to impose QDMTTs to countries which have American businesses. In terms of power game, I see the US much stronger today than the Europeans getting there. So that’s nuance I would bring to your remark.

Patrick J. O’Gara (22:53):
Just to add, I mean I think we touched on earlier the kind of midshore jurisdictions that have pretty much uniformly moved to QDMTT territory. But you’re right, Loren, there is a number of traditional tax haven-type jurisdictions that have not. I do wonder if the EU might adopt a different approach and interested in your views in this, Pascal. I wonder if for those jurisdictions we’ll be looking at kind of black or gray listing depending on their reaction to this and whether if we do observe profit shifting in that direction, that becomes an alternative tool, achieve the policy objectives that we are looking to achieve.

Pascal Saint-Amans (23:30):
If I were these jurisdictions that the question I would try to see what’s going to be the reaction, the behavior reaction of American businesses? Will the push to reduce QD entities or not? I don’t know. And I’m curious to see that dynamic and I would try to assess whether I’m at risk of some form of blacklisting by the European Union and try to assess the consequences of the blacklisting of the European Union. So I think these are interesting questions which are ahead of us.

(23:58):
To prolong the remark by Loren, I think if we had good impact assessments, we would know better the competitive disadvantage. I’m struck by the fact that we do not. The OECD initially issued some impact assessments saying, “Well, actually the difference on average is very small.” But a company is not an average. So on a company-by-company approach, I’m curious to see whether you may have some cases where the difference is significant in particular on the intangible return, because I mean GILTI has moved away from taxing on the intangible return. The global minimum tax is about intangible return and the fight against tax competition is about that, so where do you put the rent? And is the rent going untaxed somewhere? And that’s where the low-tax jurisdictions used to play a role and we’ll have to see whether there is still room for this or not.

Patrick J. O’Gara (24:51):
I wouldn’t be surprised if we in a couple of years time, by the time we get to the stock take still see a common register with one jurisdiction listed as having an eligible regime here and we’ll never know probably the discussion that took place weighing of the factors that have been shared of us. But when you read the document, the central thrust of this all seems to be GMT is the common system that we want everyone to have. And that’s viewed as critically and important. And do get a sense, it doesn’t say it, that satisfying these criteria will prove to be very difficult for subsequent jurisdictions that might want to follow in the US path.

Loren Ponds (25:33):
I found it interesting that there’s only a two-and-a-half-year window for people to submit their documents. And I don’t know if that’s because the stock take is supposed to take place in 2029 and they just want it to have a hard stop. But you would imagine that this would be available to jurisdictions indefinitely, especially considering some legislative activity might need to take place before you can have a system that looks like the domestic and worldwide-qualified regimes as they’re described in the administrative guidance.

(26:04):
So whether other jurisdictions will be able to qualify by 2028, who knows? But I would imagine that you would want, because again, it gets to the spirit and I think what we’re talking about with regard to some jurisdictions who have not yet adopted a QDMTT, then we’re getting to every last dollar of income needs to be taxed and I don’t know that we’re ever going to get there, 100% compliance around the world, and is the goal to have 85% compliance and most of the time you’re paying a minimum rate of tax or are we trying to go after every single dollar euro, Franc, whatever, pound? And I don’t think that’s the goal. That can’t be the goal of tax policy. You want to get most. You’re never going to get all.

Stefane Victor (26:52):

Loren, I had a question more broadly based on something you said. Do you think that Side-by-Side is more about economic accuracy or is it more about making US outcomes feel fair to non-US tax authorities?

Loren Ponds (27:09):
I think in the spirit of minimum tax framework, that is Pillar Two, the US system looks close enough to what the Pillar Two globe rules are trying to achieve. And that’s the purpose of Side-by-Side. Certainly, as we’ve talked about, 899 injected some political pressure, other developments-

David Farhat (27:36):
899 was only for clarity purposes, just to show how clear the similarities were.

Loren Ponds (27:43):
Just to let you know.

David Farhat (27:44):
Yes, exactly.

Loren Ponds (27:45):
Which we’re going to be dealing with if... Yeah, I mean certainly there’s a political flavor, but I think the spirit of why Side-by-Side is important and relevant is truly recognition that the system here is robust enough in keeping with the spirit of Pillar Two. There’s some acknowledgement that the juice is not worth the squeeze so to speak, because we’re compliant.

David Farhat (28:09):
So to pivot away from policy a little bit, another thing that I think folks were worried about with the introduction of Pillar Two was increased controversy. We have a lot of complex transfer pricing controversy and there’s a lot of different views on transfer pricing. It meant to kind of layer Pillar Two on top of it gave a lot of folks heartburn. Now that we have Pillar Two in some areas and then we have Side-by-Side, what do you think that will do for controversy? Is that going to make it worse? Same? What are the thoughts there?

Loren Ponds (28:41):
I think jurisdictions will not stop looking for tax dollars to collect regardless of what happens with Pillar Two.

David Farhat (28:47):
100%.

Loren Ponds (28:49):
And I think what we’re seeing, David, we’ve been talking about this, and Patrick too, kind of interesting adjustments on the basis of other tax rules, so anti-tax avoidance directive claiming that certain structures are violative of those rules and denying deductions or reframing royalties, services as royalties. Those things won’t go away. And I think that regardless of whether you’re paying 15% in a jurisdiction, there’s always related-party transactions that inject some pressure into the conversation. And I don’t see that that going away. I can be wrong, but I don’t think so.

Stefane Victor (29:32):
Is Side-by-Side more effective at narrowing disputes or is it more effective at winning them outright? Will it be best understood as a dispute management tool or like a silver bullet merits met argument?

Loren Ponds (29:46):
No, I mean I think just because you’re compliant with Pillar Two won’t save you from any kind of other adjustment that the authorities might make. It’ll save you from having to pay some top-up tax if you are at that minimum rate, but that’s it. And then whatever else flows from how you’re working with your affiliates, related parties, transactions between more than one jurisdiction, you’re exposed as usual.

Pascal Saint-Amans (30:10):
It shelters you from the UTPR, which by itself could have brought its lot of controversy. So no, I fully agree with Loren. What’s interesting is the document is based on safe harbors. I mean, one of the reasons for that is that it was the way for the Europeans to get it agreed and no need to change the directive. So you have a legal trick there, which is if it’s a safe harbor and the OECD agrees by consensus on that, then it doesn’t require to change the directive. You may have domestic law changes in the countries implementing the directive, but you don’t need to change the directive, which would’ve been a nightmare or almost impossible.

(30:51):
And that’s where the Europeans could have said, “Well, actually we need to change the directive. We cannot change the directive, so try the 899 and get it passed in Wall Street. Because the credibility of 899 among tax guys, we may fake-believing in it, but when you talk to Wall Street people, they didn’t seem to believe much in it because it was really bad at the time where the dollar was not so strong. So maybe the Europeans could have played hard ball. They didn’t. And that’s where the safe harbor is so useful.

(31:20):
The other dimension of the safe harbor that’s about simplification. It does simplify, it shelters you, it’s good. Have we removed all the complexity of Pillar Two? Obviously not. I fully concur with you. It’s extremely complex. It cannot be simple. I mean, you cannot have common rules for, I mean linking national sovereignty across the world with simple rules. And it does something that interestingly people don’t recognize to clearly, it does move towards some form of harmonized tax base. I mean, the Europeans failed to do a common consolidated tax base. Here you have some form of it. So of course it’s complex, but it’s too complex. Could it be simpler? Probably yes. And I believe the OECD with the package with the four components of the package recognizes that there is a lot of work to do and there is a commitment to do much more work on simplification.

(32:12):
Will it remove tax uncertainty and disputes? No, in particular on other areas. Does it cling to potential lack of trust of European tax administrations towards American businesses, which should be even more picky on American businesses? I don’t think so. So I’m not sure it’ll make tax administrations more aggressive towards American businesses. I think Pillar One issue is the other one. The fact that Pillar One has not progressed and we don’t see any solution there for the tech companies in particular may be more important than the Pillar Two thing.

Patrick J. O’Gara (32:48):
I thought it was interesting that certainty was not a core theme of this paper. Simplification, yes, Pascal, but certainty in terms of interpretive differences between jurisdictions that are implementing the model rules. There’s no nod towards the difficulty that that can create for the businesses that are in scope, whether they’re applying an IIR or QDMTTs. And I wonder why that is. I wonder if it’s just too big an issue to tackle to the ground, Pascal. So far we’ve not yet seen the dispute resolution mechanism that I think everyone has been hoping for since 2021. I wonder if we will get it. More doubtful now than ever.

Pascal Saint-Amans (33:31):
I don’t know, I’m not in charge, so I cannot answer your question. Is it a critical thing? Yes, it is. Is there a need for real mechanism to solve disputes? Yes, absolutely. And frankly speaking, I’ve never understood why countries are not more serious on that front. I mean, I tried hard, I mean Action 14, the BEPS action plan. I tried hard to say, “Okay, let’s move to arbitration.” “No, no, no, no, we don’t want that.” “Okay, fine. Then let’s make it a real minimum.” It is a minimum standard, but not a real one with an assessment and the allocation of a mark for the countries, and then negative consequences if you’re bad. There has been some progress, not enough. I believe there will be progress. I mean, Robert Danon from Lausanne and others are working very hard on this dispute resolution mechanism for Pillar Two, so I wouldn’t be too pessimistic there.

(34:25):
Can you move to or will have a common interpretation of terms? I mean what you’ve just said, Patrick, which could make sense. We have common rules, so let’s interpret them properly. To get there, you would first need to have the US say something else than just, “So we have our own regulation, get off my way.” I mean, I will never try to get common interpretation with you. So that’s one of the obstacles on that way. And we’ll see whether what I call the international tax framework or infrastructure will survive or not to the geopolitical tensions, which are, I mean, much more important than prevailing over the tax cooperation. So we’ll have to see that.

David Farhat (35:07):
Patrick, one question kind of following along these lines. As US companies are kind of celebrating not having to be in the regime and have the complexity, what’s the outlook from the European countries? What are they thinking about and what should they be thinking about in this new Side-by-Side world?

Patrick J. O’Gara (35:23):
Yeah. Well, I think we’ve kind of touched on it, David, and I guess it comes back to the paranoia of whether Europe has lost competitiveness with this deal and what will that mean over time? Will we see a behavioral reaction of new business capital formation being predominantly in the US? Will we see re-domestications over time or the return of formerly US-headquartered groups? Possible. At the moment, I don’t see it. I don’t see it because of the primary point that we’ve been kind drawing out here, which is so long as we live in a QDMTT world, the competitive advantage is I think marginal as compared to the other factors, the weigh in that balance.

Pascal Saint-Amans (36:07):
I truly agree with Patrick. And if I may just add something we haven’t touched upon yet, these substance-based tax incentive framework, which is new, which reintroduces some form of, I mean room, some room for the countries to reduce the effective tax rate. It’s substance-based, so it’s about the countries with real activity and that probably can please the Eastern European countries. I don’t know about Ireland and Luxembourg. And so I’m doing a paper, I’m also a senior fellow at Bruegel and with Rulledom in the team, we’re doing a paper on what it means for Europe.

(36:46):
And interestingly, data drawn from CBCR seems to indicate that for countries like Luxembourg and Ireland where you would expect the intangible more than tangible, the SBTI, the Substance-Based Tax Incentive new framework gives some significant room. So that’s something you also need to take into account in terms of competitive advantage. The question may be not as critical as you could think, given that you’ve reintroduced that. And if you think that you really need to regulate tax competition as the Europeans do, and as President Biden did, I mean the previous administration thought, then these new incentives are not great for Pillar Two. If you think that you need more room for maneuver, then this new framework is good.

Loren Ponds (37:28):
I agree with you, Pascal. I think there’s more to take into consideration even if the QDMTT framework is not as robust as one would hope, I’m not certain that makes the US look like such the haven when you’re only thinking about Pillar Two. There are certainly other taxes that businesses pay here as well as just operating in the US is not necessarily easy. So I’m not sure about the haven argument or the fear that Europe is so much less of a competitive jurisdiction that folks are fleeing to the us particularly in light of what Pascal has raised with regard to the incentives that are now kind of built into the safe harbor framework. And it gives countries a lot of room to compete on things other than tax rate, so to speak.

David Farhat (38:17):
And to quote our co-host who couldn’t make it today, Nate Carden, “If you want reasons not to come to the US, we can spend a lot of time giving you a bunch of those from a tax perspective.”

Loren Ponds (38:28):
Another episode.

David Farhat (38:34):
Yeah.

Loren Ponds (38:34):
complete with charts.

David Farhat (38:38):
Yes, detailed charts, PowerPoints, etc. We’re coming towards the end of the episode and I would like to say thanks again to Pascal for joining us, and Patrick as well. But before we wrap, any kind of final thoughts on the Side-by-Side, either from a policy perspective or from a practical perspective, “Hey, this is what folks should be looking out for”? And, Patrick, I’ll start with you. And then, Pascal, please after that.

Patrick J. O’Gara (39:04):
Yeah. Okay, great. So I guess one practical issue that we’re seeing already is, “Well, what am I going to do for 2026 if I’m looking at a UTPR exposure across the world?” And I guess that comes down to the implementation of this package and who’s going to be the last holdout to implement it, and what does that mean from a provisioning perspective for a financial accounting reporting? The UK has already come out to say we’re not going to legislate for this until the Finance Act 2027, which will not be substantially enacted until late March, early April ‘27. So from a financial reporting perspective, the US multinationals that do have a 2026 exposure, that seems a little bit unsatisfactory in terms of how that’s going to play out. And I’m sure we’re going to see similar issues elsewhere as we come to the tie hits the road in terms of enacting this into law domestically.

Pascal Saint-Amans (40:04):
What I would say is has the system stabilized with the Side-by-Side a bit. It’s not collapsing or you don’t have another trade war triggered by the dispute, so it’s some form of armistice. I mean, you calm things down. Is it stabilized? Not yet. We’ll have to watch very carefully the dynamic first within countries and among countries on the QDMTT, on the ability of the OECD to watch that. And also, on the conversation between the US and the QDMTT countries, whether it’s consistent with the commitment or not, I’m curious to see, and what Europe will do out of that. And also, if there is no massive competitive advantage, which probably is the case, I would agree with what has been said. Things may calm down in Europe. If there is a competitive advantage, well then the opponents of Pillar Two in Europe may say, “Hey, why do we keep this thing?” And finally, we’ll have to watch what China, which is an important player, will do on that front. So many moving pieces, which makes life of tax director so exciting.

David Farhat (41:15):
Well, thanks so much both, and it sounds like we’re at a bit of a detente in the international tax community with Pillar Two, so we should enjoy that as opposed to having the conflicts. But once again, this has been another episode of GILTI Conscience. Thank you all for joining.

Voiceover (41:32):
Thank you for joining us for today’s episode of GILTI Conscience. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Skadden’s tax team is recognized globally for providing clients with creative and innovative solutions to their most pressing, transactional planning and controversy challenges. Additional information about Skadden can be found at skadden.com.