Executive orders reshape tax landscape

President Donald Trump’s flurry of executive orders upon taking office sets the stage for significant tax action and could have an immediate impact on Pillar 2 implementation, energy credit projects, and IRS guidance.

Trump’s sweeping and immediate executive actions included several executive orders and memorandums affecting tax issues, including orders suspending hiring at the IRS, freezing all regulatory action, limiting energy credit projects, and targeting global tax agreements negotiated by the Organisation for Economic Co-operation and Development (OECD). The following covers the tax implications of key administrative actions.

OECD tax agreements

The Trump administration released a brief memorandum on Jan. 20 asserting that global tax deals have “no force or effect in the United States.” The memo directs the Treasury Secretary and U.S. Trade Representatives to immediately rescind any commitments or agreements under global tax deals and develop options for retaliating against foreign countries that impose rules that are “extraterritorial” or “disproportionally affect American companies.” A separate memorandum directs Treasury to investigate whether any foreign or country subjects U.S. citizens or corporations to discriminatory or extraterritorial taxes under Section 891. The same directive orders trade officials to look into various tariff and nontariff trade barrier options.

The memos target the OECD’s two-pillar framework for overhauling international tax rules. Efforts to create unified rules under Pillar 1 allowing countries to tax profits from digital goods and services from taxpayers without a physical presence in their jurisdiction have largely stalled. But implementation of global minimum tax rules under Pillar 2 are currently in effect or moving forward in many countries.

In some ways, the memos on U.S. implementation of Pillar 2 are unsurprising and don’t, on their face, significantly alter the outlook. The U.S. has so far failed to enact any legislation that would align U.S. tax rules with Pillar 2, and Republicans were never expected pursue it. On the other hand, however, the new threats of reciprocal action could affect implementation abroad and result in new taxes or tariffs.

Section 891 would allow the president to double the tax rates on corporations and individuals from foreign countries that target U.S. companies and individuals with discriminatory or extraterritorial taxes. House Ways and Means Chair Jason Smith, R-Mo., also reintroduced legislation that would impose reciprocal taxes on countries that implement the Undertaxed Profits Rule (UTPR) under Pillar 2.

The ultimate impact of the memos will depend both on how the administration moves forward from here and how other countries react. The OECD is a consensus-based organization, and the U.S.’s refusal to meaningfully participate could affect the ability of participating countries to continue to develop guidance and implement the rules. Implementation itself will be driven by discreet law changes in each foreign jurisdiction, and countries afraid of reciprocal action by the U.S. could also unilaterally choose to delay or forgo various aspects of the rules in their jurisdictions.

Trump’s position could also create more leverage for the administration to seek more favorable treatment under the rules. The UTPR, in particular, could be ripe for further delay. The past administration was seeking relief for the research and development (R&D) credit so that it would reduce not effective tax rates and be clawed back by minimum taxes.

Still, many countries could remain committed to implementation of significant aspects of the rules. To the extent other countries move forward on rules considered by the administration to be discriminatory or extraterritorial, reciprocal taxes or tariffs are possible on both sides. Countries that impose digital service taxes or UTPRs are likely to face retaliatory action.

While Trump did not immediately impose any new tariffs upon taking office, he positioned his administration to pursue an aggressive tariff agenda. His Jan. 20 order focused on trade leaves open the door to renegotiating the updated North American Free Trade Agreement and the examination of existing trade treaties, as well as other ongoing international trade. In remarks to reporters, Trump pledged to impose the 25% tariffs on the U.S.’s two largest trade partners, Mexico and Canada, on Feb. 1, though this could be part of a public negotiating position.

Rulemaking freeze

Trump issued an executive order freezing all regulatory rulemakings either in-progress or not yet published in the Federal Register, and directed agencies to consider a 60-day delay in the effective date of any rules recently published in the Federal Register. The rules will be subject to review and approval by “a department or agency head appointed or designated by the President.”

The freeze has become relatively standard practice and was implemented by both Trump in his last term and former President Joe Biden. The Jan. 20 executive order does not identify any specific regulations for amendment or repeal, but broadly targets and rules issued in the waning days of the Biden administration. Notably the order provides exceptions for rules that are statutorily or judicially required to be issued in short order, and the new Office of Management and Budget (OMB) director has leeway to allow rules to move forward to address “emergency situations or other urgent circumstances.”

The executive order could slow down tax ongoing guidance initiatives and also affect recently released tax guidance projects, including the recently finalized 45Y and 48E technology-neutral energy credit rules, proposed PTEP rules, final Section 987 regulations, and final rules to identify certain partnership basis-shifting as transactions of interest, if they are targeted for a 60-day delay and review. Congressional Republicans could also seek to overturn tax regulations through the Congressional Review Act, which was used 16 times in the first Trump administration, though not on tax regulations.

The administration could also more broadly target final regulations passed over the past year. In his first term, Trump issued an executive order in 2017 to review all “significant tax regulations” issued over the prior year to identify any that imposed an undue burden on taxpayers, added undue complexity to the tax law, or exceeded the statutory authority of the IRS. Treasury ultimately identified eight regulations, which led to a handful of changes. 

Executive branch staffing changes 

Trump also issued multiple executive orders related to staffing within the executive branch, including a hiring freeze that could last longer at the IRS than other agencies and departments.

The temporary hiring freeze applies to much of the federal government. Under the order, the OMB, in consultation with the Office of Personnel Management and U.S. Department of Government Efficiency Service (USDS, informally as ‘DOGE’) are directed to submit a plan to reduce the federal workforce “through efficiency improvements and attrition.” The plan must be submitted by April 20, after which the partial federal hiring freeze will be lifted.

However, the order singles out the IRS for a likely longer hiring freeze, directing that the freeze shall remain in effect for the agency until the Treasury Secretary, in consultation with the OMB Director and head of the USDS “determines that it is in the national interest to lift the freeze.”

The IRS freeze is the latest indication that Trump and congressional Republicans plan to roll back much, if not all, of the additional resources granted to the IRS by the Inflation Reduction Act.

Trump has also ordered a change in status to tens of thousands of governmental employees, including within the IRS, aiming to make them easier to fire. The National Treasury Employees Union, a union representing governmental workers at the IRS and other agencies, filed suit in the U.S. District Court of the District of Columbia to block the order on the same day, Jan. 20, on the grounds that Trump’s order violates congressional intent around much of the nonpolitical positions within the civil service. This issue could take some time to resolve in court.

Trump released a tandem order to increase political influence over the Senior Executive Service, a category of approximately 9,000 nonpolitical civil servants in senior leadership roles within the federal government, and authorize the transfer of any of them to a different position to ensure they are “properly accountable to the President.”

Separate from the executive orders, former IRS Commissioner Danny Werfel resigned on Jan. 20. Douglas O’Donnell was named acting commissioner. O’Donnell, the former deputy commissioner for services and enforcement, is a 38-year veteran of the agency and previously served as acting commissioner prior to Werfel’s confirmation. Former Rep. Billy Long, R-Mo., has been nominated by Trump to lead the agency. The Senate Finance Committee has not yet set a date for his confirmation hearing.

Trump targets alternative energy projects

Trump issued two separate executive orders targeting electric vehicles and wind energy projects.

The “Unleashing American Energy” order calls for terminating emissions waivers that favor EVs, removing “unfair” EV subsidies, and pausing the disbursement of Inflation Reduction Act funds relating to EVs and climate change. While the moves will not directly affect the availability or eligibility of energy tax credits, they could affect the economic viability of projects that rely on grant programs.

Separately, Trump, an outspoken critic of wind power, issued an executive order withdrawing all offshore areas for wind energy leasing and ordering a temporary moratorium on approvals of permits for on- and off-shore wind projects. That moratorium will remain in place until a review of permitting practices and environmental impact of such projects can be completed.

The actions show an intent by the administration to repeal IRA energy incentives, an aim shared by many congressional Republicans.