How the "Foreign Entities of Concern" IRA Guidance Gives America Control of its Electric Vehicle Future

ZETA Staff
ZETA Staff
ZETA Staff
December 1, 2023

ZETA Overview of the Biden-Harris Administration’s Proposal to Implement the Foreign Entities of Concern Rules Under the 30D New Clean Vehicle Tax Credit

Background

Signed by President Biden in August 2022, the Inflation Reduction Act (IRA) created and modified a series of clean vehicle tax credits designed to simultaneously reduce the EVs’ cost and bolster the development of a domestic supply chain. For more information on how the IRA tax credits are affecting the electric vehicle (EV) supply chain, see here.

As part of the § 30D New Clean Vehicle Tax Credit, the IRA includes language to onshore the EV supply chain and impose safeguards to prevent so-called “foreign entities of concern,” or FEOCs, from benefiting. In December 2022, the Treasury Department issued a white paper outlining how the § 30D credit provisions would be operationalized. In March 2023, Treasury issued guidance detailing how it would implement the critical mineral and battery component sourcing requirements tied to the credit.

In December 2023, the Department of Energy proposed a more granular definition of FEOC. The language offers much-needed clarification on key terms such as foreign entities, government of a foreign country, jurisdictional applicability, and foreign entity ownership and control. Treasury also proposed concurrent updates to formally adopt the Department of Energy’s definitions into its regulations and add administrative procedures related to implementation.

A summary of the Department of Energy’s proposed definitions can be found below, including analysis on the implications of these new rules on the U.S. clean vehicle supply chain. Taken together, these proposals provide the private sector with the clarity and certainty necessary to meet the IRA’s stringent materials sourcing requirements. The proposals also create the regulatory conditions necessary to foster continued historic investment in the domestic EV supply chain while enabling consumers to more easily access cheaper, cleaner, American-sourced EVs. ZETA’s full statement can be found here

Affected Entities

  • Critical mineral producers and processors.
  • EV battery manufacturers and recyclers.
  • Clean vehicle manufacturers.
  • New clean vehicle buyers.

Overview

The Inflation Reduction Act refers to the Bipartisan Infrastructure Law’s definition for Foreign Entity of Concern (FEOC) which includes foreign entities “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation.” Specific covered nations are China, Iran, North Korea, and Russia. In its December 2023 guidance, the Department of Energy breaks down the FEOC concept into a series of key terms that provide additional guidance to players throughout the EV supply chain: 

  • Foreign entity 
  • Government of a foreign country 
  • Subject to the jurisdiction 
  • Owned by, controlled by, or subject to the direction 

The guidance takes a two-pronged approach to determining whether an entity is a FEOC:

  1. If an entity is subject to the jurisdiction of a government of a foreign country that is a covered nation, the entity is a FEOC.
  2. If an entity is owned by, controlled by, or subject to the direction of a government of a foreign country that is a covered nation, the entity is a FEOC. This applies if:
  • ~The entity has cumulative direct or indirect control greater than 25% of board seats, voting rights, or equity interest by a covered nation.
  • ~A non-FEOC has entered into a licensing agreement with a FEOC and that agreement gives the FEOC effective control over the business operations.

The Department of Energy’s implementation of the FEOC requirements hinges on “control,” of which multiple types are articulated:

  • Direct Control—when a foreign country that is a covered nation controls at least 25% of the board seats, voting rights, or equity interests of an entity.
  • Indirect Control—when a parent entity (including the government of a foreign country) directly holds 50% or more of a subsidiary entity’s board seats, voting rights, or equity interest, then the parent and subsidiary are treated as if the subsidiary were an extension of the parent. If a parent entity directly holds less than 50% of a subsidiary entity’s board seats, voting rights, or equity interest, then indirect control is attributed proportionately.
  • Effective Control—when a contractor in a contractual relationship has the right to control production, consumers, and site access, or the exclusive right to maintenance and operation of critical equipment.

The Department of Energy’s interpretation ensures that governments of covered nations cannot evade the FEOC restriction simply by establishing a U.S. subsidiary while otherwise maintaining ownership or control over that subsidiary.

The guidance addresses the issue of intellectual property through the definition of effective control. This is best understood via the following example:

  • Entity A is NOT a FEOC via the 25% voting interest, equity, or board seats held indirectly or directly by a covered nation threshold. 
  • Entity A enters into an intellectual property licensing agreement with a FEOC.  
  • Entity A would only be considered a FEOC if that licensing arrangement or other contract entitles the FEOC to effective control over the production (extraction, processing, recycling, manufacturing, or assembly) of the critical minerals, battery components, or battery materials.

Department of Treasury

Released concurrently with the Energy Department’s FEOC definitions, Treasury’s guidance spells out the certification procedure for determining that a battery is FEOC-compliant and the associated reporting requirements. At the same time, Treasury acknowledges that tracing low-value materials and exact masses of critical minerals/associated constituent materials within a cell may not be immediately possible. With this in mind, the guidance provides room for interim exceptions and requests feedback via public comment.

ZETA Analysis

The provisions in the December 2023 Department of Energy proposed rule create a stringent but workable pathway to resilient EV supply chains controlled by the United States and its allies. To qualify for the § 30D tax credit, EV manufacturers must trace their supply chains end-to-end to ensure compliance with these rules. Paired with the additional administrative implementation guidance from the Department of Treasury, industry now has a more stable framework to ensure materials are indeed predominantly sourced in the U.S. and its allied trading partners. 

The content requirements embedded in the § 30D credit and outlined in this set of guidance are supported by other provisions in the IRA that bolster U.S. manufacturing processes. For example, the § 45X Advanced Manufacturing Production and the Advanced Energy Project Tax Credits provided historic support for domestic battery manufacturing and critical mineral production. Together with consumer incentives, these provisions have made the U.S. the world’s most attractive business partner and spurred tremendous investment. Since the passage of the IRA, $173 billion has been invested in U.S. EV and battery manufacturing and 212,000 jobs have been announced to support these facilities. Many key actors throughout the supply chain have been waiting for this much-needed clarity on FEOC, and ZETA expects this latest guidance to spur additional investment in the clean vehicle industry.

Looking ahead, the challenge is whether the U.S. can create an efficient domestic permitting pathway to onshore our clean energy supply chain before the IRA incentives have phased out. Policymakers must act quickly to reform the U.S. permitting processes for critical materials. While increased partnerships with allied nations are crucial, there is still a significant need to improve the domestic mining and processing capacity of the U.S. 

ZETA supports a project-based reform framework that features eight key components established to ultimately increase the domestic supply and processing capacity of critical minerals and materials here at home. Through the appropriate permitting reforms, we can accelerate project deployment and fortify our clean energy supply chains without compromising the stringency of environmental and social standards. 

ZETA applauds the Biden-Harris administration for its historic work to strengthen domestic clean energy supply chains and decarbonize the transportation sector. While there is still more work to be done, these FEOC rules go a long way towards creating the regulatory certainty needed to unlock additional private sector investments.

About ZETA

The Zero Emission Transportation Association is a federal coalition focused on advocating for 100% EV sales. ZETA is committed to enacting policies that drive EV adoption, create hundreds of thousands of jobs, secure American global EV manufacturing leadership, drastically improve public health, and significantly reduce carbon pollution.

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About ZETA

National policies to support 100% electric vehicle sales.

The Zero Emission Transportation Association (ZETA) is a federal coalition focused on advocating for 100% EV sales. Enacting policies that drive EV adoption will create hundreds of thousands of jobs, secure American global EV manufacturing dominance, drastically improve public health, and significantly reduce carbon pollution.