Background
Trade Policy and Tariff Imposition
On April 2, 2025, President Trump signed the executive order “Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficitsâ€� establishing reciprocal tariffs through the International Emergency Economic Powers Act of 1977 (IEEPA).5 ÌýThe tariffs imposed include a 10-percent duty on nearly all imports to the U.S. starting April 5, 2025, with higher reciprocal rates for countries with significant trade imbalances effective April 9, 2025.Ìý The existing IEEPA orders for Canada and Mexico remain in place and are unaffected. ÌýExceptions include (but are not limited to) certain goods such as steel, aluminum articles, auto/auto parts already subject to increased tariffs, copper, pharmaceuticals, semiconductors, lumber articles, and energy and other minerals not available in the United States. ÌýHowever, as mentioned above, on April 9, 2025, a 90-day pause was announced on the higher reciprocal rates except for higher tariff rates on imports from China.
On February 21, 2025, President Trump issued a presidential memorandum, “Defending American Companies and Innovators from Overseas Extortion and Unfair Fines and Penalties.â€�6 ÌýThe memorandum indicates that the Trump Administration is open to using retaliatory measures against any country imposing a digital services tax, or any other act, policy, or practice that would undermine the global competitiveness of U.S. companies. ÌýThis would include invoking I.R.C. section 891 (see coverage in ), which allows President Trump to double the tax rates of foreign citizens and foreign corporation of countries determined to impose discriminatory or extraterritorial taxes.Ìý
Furthermore, certain members of Congress have expressed support for a House of Representatives proposal that would impose an additional tax rate on foreign citizens and corporations of countries the Treasury has identified as imposing discriminatory or extraterritorial taxes. ÌýThese individuals and entities would also be denied the benefit of reduced withholding tax rates under any treaty obligation of the United States.7
Possible Revocation of U.S.-China Treaty
Also on February 21, 2025, President Trump signed a memorandum entitled “America First Investment Policy,â€� stating that the United States will use all necessary legal instruments to further deter U.S. persons from investing in China's military-industrial sector. ÌýThe memorandum specifically states that the Trump Administration will review whether to suspend or terminate the 1984 U.S.-China income tax treaty.8
Article 28 of the U.S.-China income tax treaty provides that it can be terminated by either country by giving notice through diplomatic channels to the other country. ÌýProvided such notice is given on or before June 30 of a particular year, the treaty will cease to have effect from January 1 of the following year. Hence, the United States would be required to give such notice by June 30, 2025, if it intends to terminate the treaty with effect from January 1, 2026.
Revocation of the treaty would have significant implications for U.S. businesses with operations in China. ÌýFor example, individuals on short-term assignments to China who are currently exempt from Chinese tax on their compensation under the income from employment article of the treaty (Article 14) would lose that exemption.
