US tax and trade policy developments: Potential implications for foreign tax credits, the state of the budget resolution, and tariff changes

Last week, President Donald Trump issued two Executive Orders (EOs) that address digital services taxes enacted by international trading partners and income taxes paid by US taxpayers to the People’s Republic of China (PRC), respectively, while US Congress saw some movement on the tax budget reconciliation.

In this weekly alert, DLA Piper’s Tax Policy team discusses relevant tax and trade EOs and federal policy developments, as well as potential legislation to watch. For more information on the Administration’s Executive Actions and our coverage of those actions, see the President Trump Executive Orders hub.

Notable EO updates from the week of February 17, 2025

• 2025.02.21 - “Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties” EO
  
  
• 2025.02.21 - “America First Investment Policy” EO

While the two EOs (linked above) were just released on February 21, 2025 – and we are still gauging reactions from the White House, Treasury, and congressional tax writers to better understand the Administration’s potential intent – our initial reaction is that they likely serve primarily to deter US investment in China from the standpoint of what could be a potential move by Congress to disallow foreign tax credits (FTCs).

It is worth noting as well that subsection (k) of the America First Investment Policy EO addresses the 1984 US-China Income Tax Convention.

Rolling back Chinese investment in US industries

It is our initial read that this “America First Investment Policy” EO suggests the Administration seeks an avenue to disallow tax credit(s) to US taxpayers on a future/go-forward basis for income taxes paid to the PRC, which, arguably, would be viewed as a deterrent for further investment in China. It is also worth noting that while the majority of this EO is focused on the PRC, it specifically addresses “foreign adversaries” and includes the following definition implicating both Hong Kong and Macau as special regions, among others:

“For purposes of this memorandum, the term “foreign adversaries” includes the PRC, including the Hong Kong Special Administrative Region and the Macau Special Administrative Region; the Republic of Cuba; the Islamic Republic of Iran; the Democratic People’s Republic of Korea; the Russian Federation; and the regime of Venezuelan politician Nicolás Maduro.”

Additionally, to the extent that China may offer tax credits to Chinese residents with inbound investment in the US – and then seek to reciprocally disallow Chinese tax credits to its resident investors – this EO may further serve as a deterrent to Chinese investment in the US, seemingly aligning with the Trump Administration’s goal of reducing Chinese investment and involvement in critical US industries and commodities.

Another point to note: Corporate tax incentives in both the US and China have been significant factors in influencing and facilitating corporate and business “behavior(s)” and, further, overarching economic performance.

However, while both the US and PRC utilize tax-based economic incentives to target and attract investment and stimulate industrial growth and innovation, the manner and extent to which these underlying mechanisms manifest differ significantly depending upon the variation in governance, jurisdictional economic structure, and overarching policy objectives, all of which are vastly different in the US versus PRC.

Note on Pillar One

The “Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties” EO also outlines the Administration's strengthened stance against foreign governments imposing discriminatory taxes and regulations on American companies, particularly within the digital economy. It addresses concerns regarding digital services taxes and other measures deemed to disproportionately burden US businesses.

This development is directly relevant to Pillar One. The memorandum signals a more assertive approach by the US government in defending its companies against unilateral digital services taxes, which could potentially lead to retaliatory tariffs and other trade actions. It also underscores the Administration's intent to scrutinize and potentially challenge foreign tax measures that are considered discriminatory or that undermine the global competitiveness of US businesses in the digital sector. The DLA Piper Tax Policy team will continue to monitor these developments closely and provide updates as they unfold, as they may have significant implications for US taxpayers.

Last week in taxes

Last week, the US House of Representatives was in a recess and district work period following the House Budget Committee’s recent passage of its budget resolution that would encompass defense and immigration, energy, and taxes.

Meanwhile, the US Senate was in session with swift floor consideration of its budget resolution, which would cover only defense, immigration, and energy provisions, while punting taxes to the Fiscal Year (FY) 2026 budget cycle. The budget resolution is the key first step to open the reconciliation pathway, but both chambers need to have passed the same version.

Ultimately, after a marathon voting session on February 20, 2025, the Senate passed its resolution with a vote of 52-48; the only Republican who voted against the measure was Senator Rand Paul (R-KY).

The impasse in Congress

While there has been budget resolution movement in both chambers, we still remain at the same impasse: House Republicans believe that the odds of passing two reconciliation bills in one year (although across two different budget cycles) are stacked against them. Recent history would support their concern, since we’ve not seen two reconciliation bills executed while one party has control over the House, Senate, and Administration.

However, Senate Republicans remain firm that any reconciliation bill that includes tax is far too complex in the face of far-too-thin vote margins, particularly in the House with a two-vote margin. That margin will be “negotiable” in just a matter of weeks if it were to ride on the FY 2025 reconciliation vehicle, which is why the Senate has stood firm on delaying a tax resolution to year’s end for the FY 2026 cycle.

To that point, in recent weeks, President Trump said he would support whatever approach could successfully clear both the House and Senate, and deliver on his tax and economic priorities – until last week, when he decided to tip the scale in favor of the House’s “one bill,” catch-all approach that would require Republicans in both chambers to quickly come to consensus on some contentious tax decisions.

However, toward the latter half of last week, President Trump came out in support of the Senate’s two-bill approach to the reconciliation process that pushes the tax portion to FY 2026, giving the first explicit signal of support for providing Congress with more time to negotiate tax reform.

Time to be proactive

The present landscape for taxes still remains a “closed door” discussion among tax writers and those who work with them to respond from a private-sector perspective to inquiries on different approaches.

The DLA Piper Tax Policy team will consider industry feedback, as well as congressional tax counsel approaches, to help achieve priority economic goals and outcomes in a manner that best aligns with our clients’ goals.

We strongly encourage clients to contact us as soon as possible for tax planning.

Provisional insights

Carried interest: For clients with concern over whether carried interest is on the chopping block, it seems President Trump’s affirmative comments to erode the provision are having the intended effect; tax writers seem increasingly inclined to look at axing carried interest, particularly when considering the multi-billion-dollar revenue that could be gained from doing so. We encourage clients concerned about this matter to contact us.

R&D expensing: A return to full expensing appears to be a possibility. A Tax Foundation analysis last year found that returning to permanent research and development (R&D) expensing – costing approximately $1.1 trillion over the ten-year budget window – is estimated to grow the US economy by more than 1.8 percent. This has proved to be a valuable point for those pushing tax writers to correct the Tax Cuts and Jobs Act-implemented change to R&D despite it seeming cost-prohibitive on the face.

Executive compensation and Section 162: There are growing proponents of addressing the US Internal Revenue Code Section 162(m) changes and pushing back on any attempts to expand the provision. However, it is too early to tell what the prospects are until a joint congressional budget resolution comes to fruition; the House and Senate will need to get on the same page with the initial approach, or the remainder of the road ahead for taxes will be challenging.

GILT/FDII/BEAT and Pillar Two: Following very recent conversations with tax counsel on tax writing committees, there’s an increasing eye on overall “permanency” in the Code to give companies more certainty and, therefore, stability. Given the unwavering assertions that Republicans in Congress will be retaining the global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and base erosion and anti-abuse tax (BEAT) regime, they likely have an eye toward grandfathering with respect to Pillar Two compliance. We are watching these developments.

“Made in America” incentives: The internal discussions and idea sharing on “made in America” incentives in the face of President Trump’s focus on implementing tariffs and retaliatory tariffs continues to grow; case and point, see the below bill introduced this week (HR 1396) on pharmaceuticals.

• Note for clients: Per the EOs issued on February 21, 2025, and in tandem with recent EOs and bicameral legislation on reciprocal and retaliatory tax, both the Administration and Congress seem fully committed to the “America First” policy, including “Made in America” incentives. This is an opportune time for clients to contact the DLA Piper Tax Policy team regarding what might be valuable in domestic and US incentives, so we can start discussions with tax writers and their counsel to seek ideas and input on this point.

Trade, tariffs, and President Trump

Last week, the government’s action on tariffs were largely rhetorical, with President Trump announcing to the press that he intends on imposing a 25-percent tariff on imports of automobiles, pharmaceuticals, and semiconductors. With respect to pharmaceuticals, President Trump said the rate would be "25% and higher and it will go very substantially higher over the course of a year." He added that he wants to give companies time to move their manufacturing operations into the US to avoid the proposed tariffs on pharmaceuticals, suggesting the new tariffs will be imposed in the coming months, not weeks.

This timeline is consistent with the previously issued “America First Trade Policy” memorandum and “Reciprocal Trade and Tariff” memorandum, which task agencies with issuing reports by April 1, 2025 on existing US tariff regimes and trade imbalances with foreign countries and providing recommendations on further tariff and other trade actions to address US trade deficits and foreign tariffs on US exports. Following issuance of these agency reports and recommendations, reciprocal and industry-specific tariff actions are anticipated as early as April 2, 2025.

Key tax/trade bills introduced the week of February 17, 2025

H.R.1367 - To amend the Internal Revenue Code of 1986 to repeal the credit for new clean vehicles, and for other purposes.

H.R.1378 - To amend the Internal Revenue Code of 1986 to extend the temporary increase in limitation on the cover over of distilled spirits taxes to Puerto Rico and the Virgin Islands.

H.R.1414 - To amend the Internal Revenue Code of 1986 to restore the amount of the orphan drug tax credit.

H.R.1424 - To amend the Internal Revenue Code of 1986 to increase the employer tax credit for paid family and medical leave.

H.R.1440 - To amend the Internal Revenue Code of 1986 to repeal the excise taxes on wagering.

H.R.1441 - To amend the Internal Revenue Code of 1986 to establish a tax credit for the purchase and installation of certain water filtration systems in homes.

S.608 - A bill to amend the Internal Revenue Code of 1986 to require additional information on math and clerical error notices.

S.615 - A bill to amend the Internal Revenue Code of 1986 to repeal the excise taxes on taxable chemicals and taxable substances.

S.631 - A bill to amend the Internal Revenue Code of 1986 to enhance the rehabilitation credit for buildings in rural areas.  

Key upcoming meeting to note

February 25, 2025: House Ways and Means Subcommittee hearing on “American Trade Enforcement Priorities” 

Learn more

We look forward to bringing you timely updates in the near future. To learn more about these rapidly evolving developments, please contact Evan Migdail or Melissa Gierach, or check out our resource page with related materials focused on the tax implications of recent tax and trade proposals.