On Friday, December 1, 2023, the U.S. Department of Energy (DOE) and U.S. Department of Treasury concurrently released two long-anticipated Notices of Proposed Rulemakings regarding the “Foreign Entity of Concern” (FEOC) exclusion—a key provision relevant to electric (EVs) and other clean vehicle tax credits under the Inflation Reduction Act of 2022 (IRA) and DOE grants under the Infrastructure Investment and Jobs Act of 2021 (IIJA). The same day, the Internal Revenue Service (IRS) also issued guidance setting forth procedures for automobile OEMs to certify vehicles as qualifying for clean vehicle tax credits. The FEOC definition provided in DOE’s guidance is similar to, but different from, the Department of Commerce’s proposed FEOC definition implementing the CHIPS and Science Act, which it issued in September, 2023 (Hogan Lovells Summary). This FEOC definition is applied in two areas:
- The IRA excludes EVs/clean vehicles from eligibility for the $7,500 Section 30D consumer tax credit for any EV/clean vehicle with a battery containing components manufactured or assembled by an FEOC (for vehicles sold on or after January 1, 2024) or containing minerals mined or processed by an FEOC (for vehicles sold on or after January 1, 2025).
- The DOE’s $6 billion grant funding under the IIJA’s Battery Materials and Processing and Battery Manufacturing and Recycling Programs (“Battery Grant Programs”) prioritizes funding projects that will not use battery materials supplied from FEOCs.
Due to the scope and potential dollar value associated with both of these programs, the December 1, 2023 guidance will have significant implications for consumers, automotive OEMS, battery manufacturers, and suppliers up and down the global supply chain, in particular for US EVs.
The Department of Energy is now accepting written comments from stakeholders through January 4, 2024. Treasury is similarly accepting comments for its proposed rule through January 19, 2024.
FEOC background & implication of designation
The IRA section 30D FEOC exclusion cites to the term’s definition in the Infrastructure Investment and Jobs Act (IIJA) (42 USC 18741(a)(5)). Subparagraph (C) of the IIJA definition states that an FEOC is an entity “owned by, controlled by, or subject to the jurisdiction of a foreign country that is a covered nation [i.e., North Korea, China, Russia, and Iran].” The statute left the question of what constitutes ownership, control, or jurisdiction to the Administration to implement through rulemaking.
The term “foreign entity of concern” also appears in the CHIPS and Science Act (CHIPS), which prohibits semiconductor manufacturing grants from benefiting FEOCs either directly or through partnerships (“guardrails”). The US Department of Commerce finalized its own FEOC definition in connection with the CHIPS program in September, 2023. In this rule, Commerce included in the FEOC definition any entity in which a Chinese (or Russian, Iranian, or North Korean) person (or company) directly or indirectly holds at least a 25 percent equity or voting interest, or 25 percent of board seats.
Dual proposed rules
The proposed interpretive rule issued by DOE is largely definitional, focusing specifically on how DOE interprets the various aspects of FEOC, including “owned by”, “controlled by”, “subject to the jurisdiction of”, and what constitutes a “government” of a covered nation. Treasury’s proposed rule, on the other hand, provides a broader framework for Administering the Section 30D tax credit. Treasury’s rule, along with the IRS revenue procedure issued the same day, adopts DOE’s FEOC definition for purposes of implementation of the 30D tax credits, and establishes procedures under which automakers can provide to DOE and IRS documentation, due diligence, and other information demonstrating that battery components and critical minerals used in EV batteries are not linked to FEOCs. These procedures include details on how OEMs and battery manufacturers will track and apportion battery components and minerals to demonstrate avoidance of FEOC restrictions so vehicles can be certified as qualifying for the 30D tax credit.
Collectively, the proposed DOE and Treasury rules span more than 80 pages with detailed definitions and examples. The proposed DOE (interpretive) rule states that an entity incorporated in, headquartered in, or performing the relevant activities (with respect to such activities) in a covered nation will be classified as a FEOC. An entity not based in or conducting activities in a covered nation – even a wholly owned subsidiary of an FEOC – is an FEOC only if:
A covered nation or covered nation government representatives directly or indirectly own or control such entity (eg subsidiary). An entity for this purpose is considered ‘owned by’ or ‘controlled by’ such government/government representative if 25 percent or more of the entity’s board seats, voting rights, or equity interest are cumulatively held by” such government/government representative. For this purpose a government representative is a current or former ‘senior’ official in the government or the dominant political party, or any spouse, parent, sibling, child or spouse’s parent or sibling of such current or former official; OR
An FEOC (affiliated or not) has ‘effective control’ of the entity’s production via a licensing or other contractual agreement. The DOE proposed rule also provides a safe harbor for any entity licensing or otherwise contracting with an FEOC to demonstrate to DOE that it still retains sufficient control over production such that it is not deemed an FEOC.
The full text of the DOE and Treasury rules can be found here.
The DOE/Treasury proposed definition of FEOC is similar to what Commerce issued with respect to CHIPS funding earlier this year with two important distinctions: (1) The DOE proposed definition of FEOC for the 30D tax credit is more lenient than the Commerce CHIPS definition in that 25% or more owned/controlled subsidiaries based outside of FEOC countries under the DOE proposal are not automatically considered FEOCs themselves. In other words, under the CHIPS guidance, a 25% or more owned or controlled subsidiary of an FEOC is automatically considered an FEOC. This is not the case under the DOE rule. (2) On the other hand, the DOE definition can in application be more stringent than the CHIPS definition in that the DOE proposal confers FEOC status on any entity that licenses intellectual property from or otherwise contracts with an FEOC --regardless of where the licensee is located/incorporated or of any affiliation with a FEOC -- if such license or contract provides the FEOC with effective control over the licensee’s/non-FEOC contract party’s production. The licensing aspect is unique for purposes of section 30D since a reality of the current EV battery supply chain is that at least some auto OEMs will need to license certain battery technology from FEOCs. While this is an additional requirement from CHIPS, the proposed DOE rule via the safe harbor provides some clarity that, at least in certain circumstances, OEMs will be able to license technology and still take advantage of the Section 30D consumer tax credit.
Another interesting aspect of Treasury’s proposed rule has to do with supply chain tracing and due diligence requirements that OEMs will be required to undertake in order to demonstrate that their battery parts, components, and critical minerals are FEOC-compliant. In its rule related to critical minerals, for example, Treasury proposes a category of “non-traceable battery materials” that OEMs will not be required to trace on the basis that certain low-value critical minerals related to EV batteries are “not currently feasible to trace,” in part because “industry has not developed standards or systems for tracing certain low-value material with precision.” To solve this “inability to trace,” Treasury proposes a temporary category of non-traceable battery materials through the end of 2026, in order to allow industry supply chain tracing technology to develop. We note that this appears to be the first time the Biden Administration has stated publicly that it’s not possible for the automotive industry to trace back to the mineral in the ground for certain aspects of EV batteries. The Department of Homeland Security (DHS) currently requires all importers to be able to trace back to the mine for all parts, components, and minerals under the Uyghur Forced Labor Prevention Act (UFLPA). Since Treasury now states that its not “feasible” for industry to do so for certain battery materials—at least through 2026—it either suggests DHS will take a similar view with respect to UFLPA enforcement involving imports of those same materials (and not detain those shipments) or creates significant tension for the Biden Administration and importers in the event that they do.
Hogan Lovells will continue to monitor further guidance issued across the Administration and will keep you apprised of any significant updates. Should you have any questions or concerns about the potential implications of this guidance for your business, whether or not your EV battery would qualify for the consumer tax credit under 30D, or wish to file comments on either the DOE or Treasury proposed rule, please do not hesitate to contact any one of us. We are also happy to discuss supply chain tracing and due diligence requirements for compliance with new FEOC rules and other related laws and regulations.
Authored by Jamie Wickett, Kelly Ann Shaw, Mike Bell, and Ches Garrison.