Bring water and oxtail to a boil in a pot. Skim the foam and oil off the surface. Add 1 onion, fish sauce, star anise, cinnamon, and salt. Stir in pho flavor paste; cover loosely with a lid. Reduce heat and simmer broth for at least 6 hours.
Cut the remaining onion in half and slice very thinly. Place in a bowl with scallions and cilantro.
Place noodles in a large bowl and rinse. Cover with warm water and let soak for 1 hour.
Drop meatballs into the soup 20 minutes before broth is done.
Bring a small saucepan of water to a boil. Drain noodles and dip into the boiling water for 30 seconds. Transfer noodles into 8 large bowls.
Top each bowl with sliced sirloin. Ladle in broth, meatballs, and oxtail. Taste and season as needed. Squeeze 1 or 2 lime wedges into each bowl and mix in 1/2 teaspoon sugar. Top with the cilantro-onion mixture, bean sprouts, basil, and shallots.