Midweek Tax News

On Monday, 5 January, the OECD published details (and a press release) regarding the Inclusive Framework’s agreed Pillar Two ‘side-by-side package’. This package was developed following the G7 announcement in June 2025 that it had reached a shared understanding regarding US exemption from the Pillar Two global minimum tax rules (IIR and UTPR) in recognition of the existing US minimum tax rules to which they are subject.

Key elements of the package announced this week include:

• ‘Material simplifications’ intended to reduce compliance burdens for multinational enterprises (MNEs) and tax authorities in calculating and reporting under the global minimum tax rules. These include a Simplified Effective Tax Rate (ETR) Safe Harbour; an extension of the Transitional CbCR (country-by-country reporting) Safe Harbour; and a work programme to implement additional simplification measures.
• A new targeted substance-based tax incentive (SBTI) safe harbour which is intended to allow multi-national groups to continue to benefit from certain tax incentives. The OECD states that this treatment will be subject to clear and transparent limits that ensure the global minimum tax will continue to provide an effective floor on income tax competition between jurisdictions.
• A ‘side-by-side’ (SBS) system consisting of two safe harbours that apply to MNE groups headquartered in jurisdictions recognised by the Inclusive Framework as having an eligible tax regime. The Side-by-Side (SbS) Safe Harbour will only be available to an MNE group that has its ultimate parent entity (UPE) located in a jurisdiction which has both an eligible domestic tax regime and an eligible worldwide tax regime. These tax regimes will only be eligible if they effectively achieve a minimum level of taxation of MNE groups’ domestic and foreign operations. MNE groups that elect for this safe harbour will not be subject to the IIR or UTPR. The ultimate parent entity (UPE) Safe Harbour will provide a safe harbour with respect to the domestic profits of MNE groups headquartered in jurisdictions which have a pre-existing eligible domestic tax regime. An MNE group that elects for this safe harbour will not be subject to the UTPR in respect of the profits located in the UPE jurisdiction.
• Where the Inclusive Framework has determined that a jurisdiction has a Qualified SbS or UPE Regime, that jurisdiction shall be listed as such on the OECD’s Central Record. The Central Record has already been updated to list the US as having a Qualified SbS Regime from 1 January 2026.

Additional tools and fact sheets to support implementation of the package are expected to be published in the coming weeks.

In a global EY webcast on 12 January, at 15:00 UK time, our panel will share insights on the side-by-side package, including its impacts on US and non-US multinationals. You can register here to join this webcast.

The Chancellor confirmed in a statement on Monday, 5 January, that she has directed the Office for Budget Responsibility to prepare an economic and fiscal forecast to be published on 3 March 2026. Following the release of this forecast, the Government plans to provide a response through a statement to Parliament. In line with Ms Reeves’ previous commitment to deliver only one fiscal event per year, this statement is not expected to include any significant tax measures.

As a reminder, the Finance (No.2) Bill had its second reading on 16 December. Consideration of specific clauses and schedules of the Finance Bill by a Committee of the whole House will take place on 12 and 13 January. In advance of this, a Government amendment has been tabled to increase the level of the new threshold for agricultural property relief and business property relief from £1m to £2.5m when the threshold is introduced in April 2026. This amendment follows on from the announcement made by the Government before Christmas.

The remaining clauses will be considered by a Public Bill Committee, which will conclude by 26 February. After this point, report stage and third reading will be scheduled. Third reading constitutes substantive enactment for UK GAAP and IFRS; for US GAAP, the key date is enactment. It is not yet known when the Finance Bill will be enacted.

The National Insurance Contributions (Employer Pensions Contributions) Bill – which contains the primary legislation to limit the amount of employee pension contributions made via salary sacrifice that is exempt from NICs – had its second reading on 17 December. This legislation will take effect from 6 April 2029.

Finance (No.2) Bill contains a number of changes to UK transfer pricing rules and related areas of taxation, which together represent the most material update of UK transfer pricing rules since 2004. Although many of the changes are directed at providing greater alignment to OECD principles, the Bill provides a significant relaxation in respect of UK-UK transactions and a new emphasis on arm's-length pricing of intangible fixed assets (IFAs) in transactions between connected parties. There is no change in the current general exemption for small and medium-sized enterprises (SMEs) from UK transfer pricing rules.

For financing arrangements, the existence of implicit guarantees is now codified for the purposes of establishing arm's-length interest rates. The Bill also provides for the diverted profits tax (DPT) to be replaced by a new unassessed transfer pricing profits (UTTP) regime. In addition, the Government will consult on the introduction of an International Controlled Transactions Schedule, with a view to it being effective for accounting periods beginning on or after 1 January 2027. Our global tax alert provides further detail on some of the most significant measures, and considers actions that businesses can take to prepare for the changes.

In addition, on 23 December (after our global tax alert was issued), HMRC updated its International Tax Manual to include a new section containing draft detailed guidance on the transfer pricing reforms included in the Finance Bill. As previously highlighted Midweek Tax News, HMRC has also included a new section in its International Tax Manual with practical guidance on UTPP – this section now been updated with a number of detailed examples.

On 17 December, HMRC issued Help with imported hybrid mismatches - GfC16, the latest in the series of Guidelines for Compliance (GfCs). HMRC’s stated aim in issuing its GfCs is to offer its view on complex, widely misunderstood or novel risks that can occur across tax regimes.

The guidelines deal with the ‘imported hybrid mismatch’ rules in Chapter 11 (‘Imported Mismatches’) of Part 6A TIOPA 2010. They do not address the core hybrid rules at Chapters 3 to 10 of Part 6A, or the targeted anti-avoidance rule at Chapter 13. HMRC states that the document's focus on imported hybrid mismatches is a recognition of the unique challenges that MNEs face in ensuring compliance with the imported mismatch rules, and that the best practice set out in these guidelines will help minimise imported hybrid mismatch compliance risk. HMRC states that the guidelines are not a replacement for existing HMRC guidance within its International Manual and do not represent any change in HMRC policy.

This new focus from HMRC highlights the potential need for businesses to re-assess the hybrid rules more generally, not just the imported mismatch rule, to ensure they have a robust process in place to identify the potential impact of the hybrid rules on their group. Such a process is required in order for businesses to self-assess in the relevant tax returns that there is no adjustment. The rules are broad in their application, and it is important that businesses do not just assume that the rules cannot apply to them.

As a reminder, on 10 December 2025, Double Taxation Relief and International Tax Enforcement Orders were made which ratified the UK's new double tax treaties with Andorra, Peru, Portugal and Romania (including the protocols in the last three cases). In the case of Andorra, Portugal and Romania, each treaty and protocol will enter into force when the UK and the relevant counterparty have notified each other that they have completed the necessary legal procedures to bring the relevant treaty and protocol into force.

However, the UK/Peru treaty comes into force only on the thirtieth day after the date of receipt of the later notification by both countries that the procedures required for the bringing into force of the treaty have been completed. It seems likely that the 30-day period will end sometime after 9 January 2026, meaning that the treaty may not have effect in Peru until 1 January 2027. If the treaty comes into force in January 2026, then it will have effect in the UK from April 2026 for income tax, capital gains tax and corporation tax but will only have effect from 1 January 2027 for withholding tax. This is the first tax treaty between the UK and Peru, and businesses with operations in Peru may wish to consider the impact of the articles on residence and permanent establishments, and the dividend, interest and royalty withholding tax rates.

Following the decision of the Bank of England Monetary Policy Committee on 18 December to decrease the Bank of England base rate to from 4.0% to 3.75%, HMRC announced that its interest rates for late payment and repayment will decrease. These changes came into effect on 29 December 2025 for quarterly instalment payments and will come into effect on 9 January 2026 for non-quarterly instalments payments.

On 17 December 2025, the European Commission published a package of provisional documents to establish the definitive Carbon Border Adjustment Mechanism (CBAM) regime, effective from 1 January 2026. The release includes 11 legislative acts and 13 supporting materials that outline new rules for emissions calculation, customs procedures, verification standards, and certificate pricing, impacting businesses importing goods into the EU. Key provisions include the extension of CBAM to additional goods, enhanced anti-circumvention measures and the introduction of a Temporary Decarbonisation Fund to support energy-intensive industries at risk of carbon leakage. Further details are available in our global tax alert.

On 16 December, the European Commission launched a consultation on a proposal to consolidate the directive on administrative cooperation (DAC) in the field of taxation and its amendments into one legal instrument. The DAC is the main piece of EU legislation governing administrative cooperation in direct taxation. It has been amended eight times since 2015, including to include: reporting requirements and automatic exchange of information (AEOI) on cross-border arrangements presenting a potential risk of tax avoidance (DAC6); income received from crypto-asset service providers and operators (DAC8); and information to operationalise the Pillar Two Directive (DAC9). As there is no current consolidated legal text of the DAC, the Commission will assess whether consolidating the DAC and its eight legislative amendments (DAC1-DAC9) into one single legal instrument will simplify readability and clarity for all stakeholders. As regards DAC6, the Commission will carefully consider the need for possible amendments to the reporting hallmarks. It will also assess the need to revise the current reporting thresholds for the sale of goods under DAC7 and consider options to improve the scope and completeness of information exchanged under DAC1.

We have included links to a selection of our tax alerts below. Additional articles are available in our global tax alert library.

United States: The IRS has issued a Notice which outlines how to allocate foreign taxes and recognise certain foreign currency gains losses after the repeal by the One, Big, Beautiful Bill Act (OBBBA) of the one-month deferral election.

Canada: Canada has proposed measures to boost investment by reintroducing accelerated capital cost allocation (CCA) and immediate expensing for a range of assets, including manufacturing equipment, clean energy technology, zero-emission vehicles, productivity-enhancing assets and purpose-built rental housing.

France: On 23 December 2025, the French Parliament approved a Special Finance Bill for 2026 which allows the tax rules existing in 2025 to roll over to 2026, until the vote on a new Finance Bill for 2026 early in the new year. This follows the failure by the French parliament to approve the draft Finance Bill for 2026 that was released on 14 October 2025.

Gibraltar: Gibraltar has introduced Pillar Two registration requirements and a local Top-up Tax Return for certain MNE groups under the Global Minimum Tax Act 2024. Registration is due by 28 February 2026, and a local return must be filed where a Top-up Tax liability exists, and no Global anti-Base Erosion (GloBE) return is submitted locally.

Ireland: Ireland has extended the Pillar Two registration deadline to 28 February 2026 for entities with 2024 fiscal year ends and issued guidance on inactive, dissolved and non-registered entities. Filing and payment deadlines remain unchanged.

Romania: On 15 December 2025, Romania introduced a special regime that significantly restricts the deductibility of certain expenses incurred in connection with non-resident affiliated entities. This regime applies from fiscal year 2026, but taxpayers holding or requesting an Advance Pricing Agreement (APA) for these transactions are exempt from this limitation, making APAs an increasingly important instrument.

Argentina: Argentina has updated transfer pricing compliance rules by raising documentation thresholds and introducing new procedures for master file submissions. The changes apply from late 2025 and aim to modernise and simplify compliance requirements.

Brazil: Brazil has issued guidance on the new 10% withholding tax on dividends to non-residents, which takes effect from 1 January 2026. The guidance clarifies exemptions, treatment of capitalised profits and operational rules for collection.

Brazil: On 17 December 2025, Congress approved a Bill introducing mandatory reductions in federal tax incentives, increasing the withholding tax rate on Interest on Net Equity (INE or INE/JCP) to 17.5% and increasing presumed profit margins under the Presumed Profit regime. The Bill also increases taxation for fintechs and the betting industry. Pending presidential sanction of the Bill, most provisions will apply from 1 January 2026.

Ethiopia: Ethiopia has introduced wide-ranging income tax reforms effective July–August 2025 (the Ethiopian tax year runs 8 July to 7 July). Key changes include expanded digital services taxation, revised taxpayer categories, new progressive income tax rates, minimum alternative tax, quarterly advance payments and higher withholding rates.

Kenya: Kenya has issued draft regulations to implement a domestic minimum top-up tax aligned with OECD Pillar Two rules, effective 1 January 2025. The regime applies to MNE groups with revenues of €750m or more, with public consultation open until 16 January 2026.

The latest edition of EY’s monthly global report summarising the activity in the BEPS project, as well as country specific legislative and administrative activity, is now available.