On December 1, 2023, the Department of Energy (“DoE”) issued a notice of proposed rulemaking (88 FR 84082),1 and the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued a notice of proposed rulemaking (REG-118492-23) (the “Proposed Regulations”) and Revenue Procedure 2023-38. The DoE guidance provides the definition of a foreign entity of concern (“FEOC”) for purposes of complying with criteria for DoE’s grant program established under the Infrastructure Investment and Jobs Act (“IIJA”) found in 42 U.S.C. 18741. The IRS guidance adopts the FEOC definition contained in the DoE guidance and provides rules for the application of this definition to the excluded entity restriction of the clean vehicle credit under Section 30D of the Internal Revenue Code (the “Code”),2 as amended by the Inflation Reduction Act (“IRA”).
Under the excluded entity restriction under Section 30D of the Code, vehicles are not eligible for the Section 30D clean vehicle credit if the battery contains battery components manufactured or assembled, or applicable critical minerals extracted, processed or recycled, by a foreign entity of concern (“FEOC”).3 As we discussed in our previous Legal Update, although Treasury and the IRS issued proposed regulations regarding Section 30D of the Code in March 2023, they remained silent on the “foreign entity of concern” criteria.4 As such, we previously looked at the interpretation of the term by the Department of Commerce under the Creating Helpful Incentives to Produce Semiconductors and Science (“CHIPS”) Act to speculate on where the Treasury will potentially land.5
Mayer Brown’s earlier Legal Update on the Department of Commerce’s guidance implementing the FEOC criteria for purposes of the CHIPS and Science Act (“LINK”) noted that the Commerce guidance could be indicative of how DoE and the IRS would define and apply the FEOC criteria for purposes of Section 30D of the Code.6 The DoE definition of FEOC differs in a very important way from the Commerce definition. A non-Chinese incorporated entity with at least 25% ownership by a Chinese entity or entities would be considered an FEOC under the Commerce definition. However, the DoE definition instead requires that the Chinese entity or entities that hold at least 25% ownership in the ex-China incorporated entity must also have some connection to the Chinese government. Absent that, the subsidiary entity is not likely to be considered an FEOC. Further, the Treasury guidance provides two significant exclusions from the scope of the FEOC criteria for Section 30D of the Code. First, as discussed below, the Treasury guidance provides a transition rule that exempts certain “non-traceable” critical minerals from the scope of the FEOC restriction. Second, the Treasury guidance adopts the same, narrow definition of battery components proposed in notice of proposed rulemaking (REG-120080-22). Thus, under the proposed rules, a significant portion of the battery component supply chain is essentially exempt from the scope of the FEOC criteria. These observations are discussed in more detail below.
I. DEFINING “FOREIGN ENTITY OF CONCERN”
The IRS adopts by reference the definition of an FEOC as provided in Section 40207(a)(5) of the IIJA and the guidance promulgated by the DoE. Section 40207(a)(5) of the IIJA provides, inter alia, that a foreign entity is a “foreign entity of concern” if it is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (as defined in [10 U.S.C. 4872(d)(2)]).”7 The “covered nations” include China, Russia, North Korea, and Iran.8
The DoE’s supplementary guidance clarifies the definition of FEOC in Section 30D of the Code by providing interpretations of the following key terms: “government of a foreign country;” “foreign entity;” “subject to the jurisdiction;” and “owned by, controlled by, or subject to the direction of.” Specifically, DoE would define an entity as an FEOC in one of two circumstances: 1) the entity is “subject to the jurisdiction” of a covered nation government, or 2) the entity is “owned by, controlled by, or subject to the direction of” the government of a covered nation. The DoE guidance also states that a subsidiary of an entity that is an FEOC is not automatically an FEOC. Rather, whether that subsidiary is an FEOC is determined under the second test. Below, we highlight the updates that are most critical for manufacturers in evaluating the presence of FEOCs within their supply chains.
A. Defining “Foreign Entity”
The DoE guidance proposes to define “foreign entity” to mean:
(i) A government of a foreign country;
(ii) A natural person who is not a lawful permanent resident of the United States, citizen of the United States, or any other protected individual (as such term is defined in 8 U.S.C. 1324b(a)(3));
(iii) A partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country; or
(iv) An entity organized under the laws of the United States that is owned by, controlled by, or subject to the direction of an entity that qualifies as a foreign entity.
This guidance ensures that governments of covered nations cannot avoid the excluded entity restriction simply by establishing a U.S. subsidiary, while otherwise maintaining ownership or control over that subsidiary.
B. Defining “Government of a Foreign Country”
The DoE guidance proposes to define “government of a foreign country” broadly to mean:
(i) A national or subnational government of a foreign country;
(ii) An agency or instrumentality of a national or subnational government of a foreign country;
(iii) A dominant or ruling political party (e.g., Chinese Communist Party (CCP)) of a foreign country; or
(iv) A current or former senior foreign political figure.9
The inclusion of senior foreign political figures recognizes the reality of government influence over business entities in covered nations, which is often exercised through individuals representing the government on corporate boards or acting at the direction of the government or to advance governmental interests when serving as an equity owner or through voting interests in an otherwise privately held business.
C. Defining “Subject to Jurisdiction"
The DoE guidance proposes that a foreign entity is “subject to the jurisdiction” of a covered nation government if:
(i) The foreign entity is incorporated or domiciled in, or has its principal place of business in, a covered nation; or
(ii) With respect to the critical minerals, components, or materials of a given battery, the foreign entity engages in the extraction, processing, or recycling of such critical minerals, the manufacturing or assembly of such components, or the processing of such materials, in a covered nation.
The guidance establishes an objective standard for determining if a foreign entity is subject to the jurisdiction of a covered nation, focusing on the entity’s legal status and operational presence within the covered nation. It aims to eliminate the ambiguity that can arise from relying on a nation’s subjective interpretation of its jurisdictional authority. Importantly, the guidance clarifies for manufacturers that to remove FEOCs from their supply chains, they must remove any critical minerals, battery components, and battery materials that are directly produced within the boundary of a covered nation.
D. Defining “Owned by, Controlled by, or Subject to the Direction”
The DoE guidance proposes that an entity is “owned by, controlled by, or subject to the direction” of another entity (including the government of a foreign country that is a covered nation) if:
(i) 25% or more of the entity’s board seats, voting rights, or equity interest are cumulatively held by that other entity, whether directly or indirectly via one or more intermediate entities; or
(ii) With respect to the critical minerals, battery components, or battery materials of a given battery, the entity has entered into a licensing arrangement or other contract with another entity (a contractor) that entitles that other entity to exercise effective control over the extraction, processing, recycling, manufacturing, or assembly (collectively, “production”) of the critical minerals, battery components, or battery materials that would be attributed to the entity.
In proposing this guidance, the DoE recognized that a bright-line metric for control will be necessary to ensure that manufacturers can feasibly evaluate the presence of FEOCs within their supply chains. Therefore, the DoE established the 25% threshold and provided extensive guidance on the calculation of the attenuation of control in a tiered ownership structure.
The DoE was also concerned that if “controlled by” covered only direct and indirect holding of board seats, voting rights, and equity interest by the governments of covered nations, such governments may seek to evade application of the interpretation by instead controlling “foreign entities of concern” that contract with non-FEOC entities to be the producer of record while the FEOC maintains effective control over production. Because such arrangements would defeat congressional intent, the DoE guidance also proposes an interpretation of “controlled by” that includes “effective control” through contracts or licenses with an FEOC that warrant treating the FEOC as if it were the true entity responsible for any production.
PROPOSED REGULATIONS ON SECTION 30D OF THE CODE EXCLUDED ENTITIES
The Proposed Regulations provide certain definitions and other guidance to allow manufacturers to determine whether the critical minerals or components contained in the battery comply with the FEOC requirements under Section 30D of the Code. Below, we highlight the updates that are most critical for these manufacturers.
I. DEFINITIONS OF “CRITICAL MINERALS” AND “BATTERY COMPONENT”
- Critical Minerals: under Proposed Regulations, applicable critical minerals include the list of critical minerals provided in Section 45X of the Code.
- Battery Component: the scope of battery components is the same as the scope in the prior guidance issued by Treasury related to the North American content criteria; battery components are parts of a battery that are assembled from one or more components or constituent materials. Battery components would include, but are not limited to, cathode, anode, electrolyte, separator film, cell and module, and constituent materials are battery materials that incorporate critical minerals. Non-critical mineral components upstream from these named battery components are not automatically considered battery components subject to the FEOC criteria.
Under the Proposed Regulations, a battery manufacturer or manufacturer of one of the named battery components that itself is not an FEOC could source any upstream, non-critical mineral inputs from an FEOC, incorporate those components in the battery or named battery components in manufacturing operations in North America and the subsequent battery would be considered to be FEOC-compliant.
II. FEOC-COMPLIANCE REGIME
A. Definitions of “FEOC-compliant”
The Proposed Regulations provide definitions of “FEOC-compliant” with respect to a battery component, applicable critical mineral, battery cell, or battery.
- Battery Component: for a new clean vehicle placed in service after December 31, 2023, a battery component (other than a battery cell) will be FEOC-compliant if it is not manufactured or assembled by an FEOC.
- Battery Cell10
- For a new clean vehicle placed in service after December 31, 2023, and before January 1, 2025, a battery cell will be FEOC-compliant if (1) it is not manufactured or assembled by an FEOC and (2) it contains only FEOC-compliant battery components.
- For a new clean vehicle placed in service after December 31, 2024, a battery cell will be FEOC-compliant if it is not manufactured or assembled by an FEOC and it contains only FEOC-compliant battery components and applicable critical minerals.
- Battery: with respect to a new clean vehicle placed in service after December 31, 2023, a battery will be FEOC-compliant if it contains only FEOC-compliant battery components (other than battery cells) and FEOC-compliant battery cells.
- Critical Mineral: with respect to a new clean vehicle placed in service after December 31, 2024, a critical mineral will be FEOC-compliant if it is not extracted, processed, or recycled by an FEOC.
B. Determination of FEOC-compliance
1. Timing of Determination
For critical minerals, whether an entity is an FEOC is determined at the time of extraction, processing, or recycling. The determination as to whether a critical mineral is FEOC-compliant is made at the end of processing or recycling of the critical mineral into a constituent material. For example, the guidance explicitly notes that nickel sulphate (which is not listed under Section 45X of the Code) used to produce nickel containing critical minerals that are listed in Section 45X must also be FEOC-compliant. The exception to this requirement is any mineral that is so transformed in the course of processing that the original mineral is no longer present in the battery, such as certain solvents used in the production of electrolytes.
For battery components, whether an entity is an FEOC is determined at the time of manufacturing or assembly of the battery component.
Thus, presumably an entity that is an FEOC, but subsequently changes its structure such that it is no longer an FEOC, could produce FEOC-compliant materials after it is no longer an FEOC.
2. Physical Tracking Requirement
The Proposed Regulations require physical tracking for a battery to be FEOC-compliant as follows. A qualified manufacturer must first determine FEOC-compliance of both battery components and relevant critical minerals (and constituent materials). The FEOC-compliant battery components and FEOC-compliant applicable critical minerals (and constituent materials) are then physically tracked to specific battery cells. The battery components, including battery cells, are physically tracked to specific batteries.
3. Transition Rules
Transition Rule for Non-Traceable Battery Materials
The Proposed Regulations provide guidance for “non-traceable battery materials,” which are specifically identified, low-value battery materials that may originate from multiple sources and are often commingled to such a degree that the qualified manufacturer cannot feasibly determine and attest to the origin of such battery materials. Although the Proposed Regulations contain a placeholder for the list of identified non-traceable battery materials, the Treasury and the IRS have requested comments on the best approach to addressing non-traceable battery materials.
Recognizing the potential need for a transition rule, the Treasury proposes a transition rule for non-traceable battery materials where the qualified manufacturer may exclude identified non-traceable battery material in its period written report before January 1, 2027.
Allocation-Based Determination Rule for Appliable Critical Minerals
In addition to the transition rule for non-traceable battery minerals, the Proposed Regulations provide a transition rule for the general physical tracing rule of critical minerals. As discussed above, the Proposed Regulations require physical tracking of critical minerals to specific battery cells and components to be FEOC-compliant. The transition rule provides some flexibility in that it would allow qualified manufacturers to determine the FEOC compliance of a battery cell based on a general allocation of their available mass of applicable critical minerals and associated constituent materials, to specific battery cells manufactured or assembled in a battery cell production facility. For EVs produced prior to January 1, 2027, the Proposed Regulations would allow qualified manufacturers to determine FEOC-compliance of a battery cell based on a general allocation of their available mass of applicable critical minerals and associated constituent materials, to specific battery cells manufactured or assembled in a battery cell production facility.
C. Due Diligence Requirements and Reporting, Certification, and Attestation Requirements for Qualified Manufacturers
The Treasury guidance requires qualified manufacturers to conduct due diligence and comply with reporting, certification, and attestation requirements with respect to battery components and critical minerals (and constituent materials). Revenue Procedure 2023-38 expands on these reporting, certification, and attestation requirements.
REVENUE PROCEDURE 2023-38
Revenue Procedure 2023-38 provides updates for qualified manufacturers of new clean vehicles with respect to the Section 30D clean vehicle credit, the Section 25E previously -owned clean vehicle credit, and the Section 45W qualified commercial clean vehicle credit under the Code. Below, we highlight the updates that are most critical for these manufacturers.
A. Written Agreements and Online Portal
Manufacturers are required to enter into written agreements with the IRS to become qualified manufacturers as defined in Section 30D(d)(3) of the Code.11 Beginning in 2024, manufacturers must enter into these written agreements through the IRS Energy Credits Online Portal.12 Manufacturers who previously registered and filed written agreements under older procedures must re-register through this portal.13
B. Compliant-Battery Ledger
Beginning in 2025, qualified manufacturers are required to establish a compliant-battery ledger each calendar year to qualify for the Section 30D clean vehicle credit under the Code.14 This ledger tracks a qualified manufacturer’s anticipated supply of batteries that are FEOC-compliant.15
To establish a compliant-battery ledger for a calendar year, qualified manufacturers must: (i) determine a projected number of FEOC-compliant batteries; (ii) submit an attestation with respect to the projected number, including supporting certifications and documentation; and (iii) receive approval of the projected number (in whole or in part) from the IRS. Additionally, the qualified manufacturer must later submit a year-end attestation with respect to the calendar year.16
If the IRS rejects the projected number of FEOC-compliant batteries, the qualified manufacturer will have the right to request administrative review of the IRS’s determination, submit additional information, and receive a final determination.17
C. Written Reports by Qualified Manufacturers
Qualified manufacturers are required to submit monthly written reports to the IRS by the fifteenth of each month, detailing each vehicle that may be eligible for credits under Section 30D, Section 25E, and/or Section 45W of the Code.18 These reports must include general information about the vehicle, certifications of compliance with various requirements, and specific certifications for the Section 25E previously -owned clean vehicle credit, and the Section 45W qualified commercial clean vehicle credit of the Code.19 Beginning in 2024, these reports must be filed through the IRS Energy Credits Online Portal.20
D. Effect of Errors and Fraud
If, after consulting with the DoE, the IRS, finds errors or fraud in the attestations, certifications, or documentation provided by a qualified manufacturer, it may take appropriate action.21 This includes notifying the manufacturer, providing an opportunity to cure errors, and potentially terminating the manufacturer’s status as a qualified manufacturer.22
3 See Mayer Brown Legal Update, Tax Credits for Electric Vehicles: What’s Changed with the US IRA?, September 9, 2023, by Daniel T. Kiely. Under Section 30D of the Code, new “clean motor vehicles” that meet a critical minerals requirement are eligible for a $3,750 tax credit, and vehicles that meet a battery components requirement are eligible for a $3,750 tax credit (a total of $7,500 available credit).
4 See Mayer Brown Legal Update, US Treasury Issues Proposed Regulations on Section 30D Clean Vehicle Credit and Critical Mineral Components, April 3, 2023, by Daniel T. Kiely, Meaghan Connors, Warren S. Payne, and Kyoolee Park
5 Mayer Brown Legal Update, Final CHIPS Act Regulations May Provide Insight into Definition of a “Foreign Entity of Concern” in the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, October 4, 2023, by Warren S. Payne, Timothy J. Keeler, Daniel T. Kiely, Jonathan H. Becker, Mickey Leibner, and Shelby L. Colson.
6 Mayer Brown Legal Update, Final CHIPS Act Regulations May Provide Insight into Definition of a “Foreign Entity of Concern” in the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, October 4, 2023, by Warren S. Payne, Timothy J. Keeler, Daniel T. Kiely, Jonathan H. Becker, Mickey Leibner, and Shelby L. Colson.
8 10 U.S.C. 4872(d)(2). In addition, a foreign entity may be designated to be a foreign entity of concern if the Secretary of Energy, in consultation with the Secretary of Defense and Director of National Intelligence, determines that the entity is engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.
9 “Senior foreign political figure” is further defined to mean (a) a senior official, either in the executive, legislative, administrative, military, or judicial branches of a foreign government (whether elected or not), or of a dominant or ruling foreign political party, and (b) an immediate family member (spouse, parent, sibling, child, or a spouse’s parent and sibling) of any individual described in (a). “Senior official” means an individual with substantial authority over policy, operations, or the use of government-owned resources. In the specific context of the CCP, the DoE considers current members of Chinese People’s Political Consultative Conference, and current and former members of the Politburo Standing Committee, the Politburo, the Central Committee, and the National Party Congress, to qualify as “senior foreign political figures.”
12 Section 4.02 of Rev. Proc. 2023-38. Prior to January 1, 2024, manufacturers may send their signed written agreements to IRS.Clean.Vehicle.Manufacturers@irs.gov. Section 4.03 of Rev. Proc. 2023-38.