December 06, 2023

Long-Awaited EV Guidance Proposes New Restrictions on Foreign Entities of Concern and Further Clarifications

At a Glance

  • The U.S. Department of the Treasury (Treasury) and Department of Energy (DOE) released a new proposed rule and guidance, including on compliance with Foreign Entities of Concern restrictions with impacts to electric vehicle (EV) tax credit eligibility (known as 30D).
  • These actions seek to encourage the deployment of clean vehicles while incentivizing the development of North American supply chains for battery components and critical minerals.
  • The public has until January 18, 2024, to comment on Treasury’s proposed rule and until January 3, 2024, to comment on DOE’s proposed guidance.

DOE Proposed Guidance

On December 1, the Biden administration’s Department of Energy released its latest proposed guidance related to the electric vehicle incentive expanded through the Inflation Reduction Act. DOE’s proposed guidance provides additional clarity on “foreign entities of concern” (FEOC).  The term is critical to the electric vehicle (EV or clean vehicle) market as vehicles will not be eligible, beginning in 2024, if the vehicle contains battery components manufactured in a FEOC. Beginning in 2025, EVs may not contain critical minerals extracted, processed or recycled by a FEOC. In conjunction with Department of the Treasury’s announcement, the Department of Energy released its interpretation of FEOC, initiating a 30-day comment period that will close on January 3, 2024.

The DOE guidance follows along the statutory language included in the Infrastructure Investment and Jobs Act (IIJA) (42 U.S.C. 18741). That language established the parameters for a FEOC, which, among other provisions, calls for the inclusion of ‘covered nations’ which are the People's Republic of China (PRC), the Russian Federation, the Democratic People's Republic of North Korea and the Islamic Republic of Iran. DOE also has the authority to add other countries in the future. DOE further interprets when a company is “owned by, controlled by, or subject to the direction,” by further establishing standards for evaluating those companies based on control over the entity’s board or voting rights, as well as establishing parameters around entities “cumulatively held” and those under “indirect control” or “effective control.”

If a company is “subject to the jurisdiction” of a “covered nation,” then the company would be considered a FEOC. This is even more important with respect to critical minerals, components or materials of a battery. According to DOE’s guidance, if the foreign entity engages in “extraction, processing or recycling of [] critical minerals, the manufacturing, or assembly of such components, or the processing of such materials, in a covered nation,” then it would be FEOC.

Under the guidance, compliance for battery components will occur at the time of manufacture or assembly while compliance for critical minerals will be done by reviewing the material through the process of extraction, processing and/or recycling to ensure that the companies involved throughout the phases meet the FEOC requirements. The guidance follows the increasing, statutory requirements for the increasing applicable percentages of battery components and critical minerals required to originate from North America as prescribed in the Inflation Reduction Act (P.L. 117-169.)

Treasury Proposed Regulation

On December 4, the Department of the Treasury’s Internal Revenue Service (IRS) released a proposed regulation further defining the excluded entity provisions related to the 30D electric vehicle tax credit. The rule includes a proposal for how a qualified manufacturer can ensure it is FEOC-compliant with respect to its battery, battery components and critical minerals. Critical to this compliance is the agency’s expectation around tracking materials throughout the process. The proposed regulation includes a “transition rule” for currently non-traceable battery materials, allowing for them to be excluded upon a manufacturer’s submission of a report during the up-front review process. IRS is seeking further comment on this transition rule, which is proposed to sunset on December 31, 2026. Taken with previous IRS guidance and the DOE’s proposal on FEOC, these regulations will define the consumer market for tax credit-eligible vehicles through the 30D credit. The public has until January 18, 2024, to comment on IRS’ proposed rule.

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