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Tax Alert 2025 No. 33, 3 July 2025
On 28 June 2025, the G7, under Canada’s presidency, released a joint statement announcing a new “side-by-side system” approach to the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework.1
This announcement follows various discussions over US concerns regarding the Pillar Two rules and other perceived “unfair foreign taxes”, which had culminated in proposed US Internal Revenue Code (IRC) Section 899 of the One Big, Beautiful Bill Act (OBBBA, H.R. 1). Proposed IRC Section 899 would have imposed punitive US tax measures on certain foreign-parented groups and investors resident in countries with “unfair foreign taxes” (as therein defined), such as digital services taxes (DSTs) and undertaxed profits rules (UTPRs). For more information, see EY Tax Alert 2025 Issue No. 30, Canada’s DST may trigger proposed US IRC Section 899, for the potential impact of proposed IRC section 899 on Canada.
As part of the G7 negotiations, the US has agreed to withdraw proposed IRC Section 899 from the OBBBA, contingent on the implementation of the side-by-side system and reciprocal commitments from G7 partners. Notably, the proposed section was omitted in the US Senate-released substitute amendment to the House-passed OBBBA on 28 June 2025 that included tax changes relative to the 16 June US Senate Finance Committee package.
Concurrently, Canada has announced it will rescind the Digital Services Tax Act (the Act) to facilitate broader trade negotiations with the US. As a result, the planned 30 June 2025 collection of the DST has been halted, and legislation to formally rescind the Act is expected shortly.2
As noted in the G7 statement on global minimum taxes, the delivery of a side-by-side system would facilitate further progress to stabilize the international tax system, including a constructive dialogue on the taxation of the digital economy and on preserving the tax sovereignty of all jurisdictions.
While the full scope of the side-by-side system remains to be clarified, key takeaways to date include:
- No immediate changes for Canadian-headquartered multinational enterprise (MNE) groups: These groups remain fully subject to the Global Minimum Tax Act.
- Exemption for US-headquartered MNE groups: The income inclusion rule (IIR) and the UTPR would no longer apply to US parented groups, both for domestic and foreign profits.
- This exemption appears limited to US ultimate parent entities.
- Qualified domestic minimum top-up taxes remain applicable.
- There is no indication that US subsidiaries of Canadian MNE groups will benefit from the IIR exemption.
- This exemption appears limited to US ultimate parent entities.
- Tax credit treatment under review: The G7 statement signals a reassessment of the treatment of substance-based non-refundable tax credits to better align with refundable credits.
It is important to note that the G7 statement does not yet constitute enacted or substantively enacted legislation for financial reporting purposes. Further clarity is expected through OECD Administrative Guidance and domestic legislative processes.
Learn more
For more information, contact your EY or EY Law tax advisor, or one of the following professionals:
Toronto
Linda Tang
+1 416 943 3421 | linda.y.tang@ca.ey.com
Ernest Ng
+1 416 932 4160 | ernest.ng@ca.ey.com
Leslie Ivany
+1 416 943 4595 | leslie.a.ivany@ca.ey.com
Mark Kaplan
+1 416 943 3507 | mark.kaplan@ca.ey.com
Tariq Nasir
+1 416 932 6143 | tariq.nasir@ca.ey.com
Terri McDowell
+1 416 943 2767 | terri.mcdowell@ca.ey.com
Trevor O’Brien
+1 416 943 5435 | trevor.obrien@ca.ey.com
Quebec and Atlantic Canada
Albert Anelli
+1 514 874 4403 | albert.anelli@ca.ey.com
Angelo Nikolakakis
+1 514 879 2862 | angelo.nikolakakis@ca.ey.com
Brian Mustard
+1 514 887 5521 | brian.mustard@ca.ey.com
Jean-Charles van Heurck
+1 514 490 0264 | jean-charles.van.heurck2@ca.ey.com
Joannie Ethier
+1 514 879 2718 | joannie.ethier@ca.ey.com
Nicolas Legault
+1 514 874 4404 | nicolas.legault@ca.ey.com
Nik Diksic
+1 514 879 6537 | nik.diksic@ca.ey.com
Philippe-Antoine Morin
+1 514 874 4635 | philippe-antoine.morin@ca.ey.com
Prairies
Liza Mathew
+1 403 206 5663 | liza.mathew@ca.ey.com
Mark Coleman
+1 403 206 5147 | mark.coleman@ca.ey.com
Robert Lee
+1 403 206 5326 | robert.lee@ca.ey.com
Vancouver
Eric Bretsen
+1 604 899 3578 | eric.r.bretsen@ca.ey.com
Ilia Korkh
+1 604 891 8359 | ilia.korkh@ca.ey.com
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- For more information, see the full G7 statement released by the Department of Finance.
- For more information on Canada’s DST, see EY Tax Alert 2025 Issue No. 28, Preparing for digital services tax filing and payment obligations.
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