On September 25, 2023, the Department of Commerce’s National Institute of Standards and Technology (NIST) issued final regulations1 to implement the Creating Helpful Incentives to Produce Semiconductors and Science Act (the CHIPS Act), which Congress passed in 2022 to incentivize US semiconductor manufacturing. The final rules come after NIST took public comment on proposed rules issued in March 2023 (which we covered in a piece from our US-China Trade Newsletter).
Among other things, the final rules seek to prevent funding provided through the CHIPS Act from being used to directly or indirectly benefit foreign countries of concern—North Korea, China, Russia, or Iran – by implementing limitations on activities with “foreign entities of concern” (“FEOC”) linked to such countries. Importantly, these rules may also provide insight into how the FEOC criteria will be interpreted in the context of: battery grant programs enacted as part of the Infrastructure Investment and Jobs Act (“IIJA”);2 the Section 48D tax credit enacted in the CHIPS Act; and the section 30D clean vehicle tax credit enacted in the Inflation Reduction Act of 2022 (“IRA”).3
Definition of “Foreign Entity of Concern”
The CHIPS Act prohibits the award of grants and provides for the recovery of funding provided to recipients who are subsequently found to engage in certain joint research or technology licensing efforts with a “foreign entity of concern.” Additionally, the CHIPS Act added a production tax credit for the production of semiconductors and semiconductor manufacturing equipment. Separately, the IRA substantially revised and extended tax credits for purchases of new electric vehicles pursuant to Section 30D of the Internal Revenue Code.4 However, under the IRA, these tax credits are not available for vehicles that contain battery components (beginning in 2024) and critical minerals (beginning in 2025) sourced from a foreign entity of concern.
The Department of the Treasury and the Internal Revenue Service issued proposed regulations regarding these IRA tax credits in March 2023, but these proposed regulations were silent on “foreign entity of concern” criteria. (More information on the IRA tax credits can be found in our September 9, 2022 and April 3, 2023 Legal Updates.) Although the CHIPS Act regulations issued by NIST do not apply to the FEOC criteria in the tax credits, this definition may indicate how the Administration intends to define FEOC for purposes of those tax credits.
The final CHIPS Act rules provide a concrete definition of the term, which may also be indicative of how FEOC will be interpreted in the context of IRA tax credits. As defined in the CHIPS Act rules, a “foreign entity of concern” means any foreign entity that is:
(a) Designated as a foreign terrorist organization by the Secretary of State under 8 U.S.C. 1189;
(b) Included on the Department of Treasury’s list of Specially Designated Nationals and Blocked Persons (SDN List), or for which one or more individuals or entities included on the SDN list, individually or in the aggregate, directly or indirectly, hold at least 50 percent of the outstanding voting interest;
(c) 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));
(1) A person is owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country listed in 10 U.S.C. 4872(d) where:
(i) The person is:
(A) a citizen, national, or resident of a foreign country listed in 10 U.S.C. 4872(d); and
(B) located in a foreign country listed in 10 U.S.C. 4872(d);
(ii) The person is organized under the laws of or has its principal place of business in a foreign country listed in 10 U.S.C. 4872(d);
(iii) 25 percent or more of the person’s outstanding voting interest, board seats, or equity interest is held directly or indirectly by the government of a foreign country listed in 10 U.S.C. 4872(d); or
(iv) 25 percent or more of the person’s outstanding voting interest, board seats, or equity interest is held directly or indirectly by any combination of the persons who fall within subsections (i)– (iii);
(d) Alleged by the Attorney General to have been involved in activities for which a conviction was obtained under:
(1) The Espionage Act, 18 U.S.C. 792 et seq.;
(2) 18 U.S.C. 951;
(3) The Economic Espionage Act of 1996, 18 U.S.C. 1831 et seq.;
(4) The Arms Export Control Act, 22 U.S.C. 2751 et seq.;
(5) The Atomic Energy Act, 42 U.S.C. 2274, 2275, 2276, 2277, or 2284;
(6) The Export Control Reform Act of 2018, 50 U.S.C. 4801 et seq.;
(7) The International Economic Emergency Powers Act, 50 U.S.C. 1701 et seq.; or (8) 18 U.S.C. 1030.
(e) Included on the Bureau of Industry and Security’s Entity List (15 CFR part 744, supplement no. 4);
(f) Included on the Department of the Treasury’s list of Non-SDN Chinese Military-Industrial Complex Companies (NS–CMIC List), or for which one or more individuals or entities included on the NS–CMIC list, individually or in the aggregate, directly or indirectly, hold at least 50 percent of the outstanding voting interest; or
(g) Determined by the Secretary, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States under this chapter.
Provided that Treasury’s interpretation of the term aligns with the CHIPS Act regulatory definition, there will be substantial restrictions on qualification for the IRA’s tax credits. Most notably, battery components may not be manufactured or assembled by entities that are owned 25 percent or more, directly or indirectly, by entities organized or having their principal places of business in China, Russia, North Korea, or Iran.
The definition of “foreign entities of concern” under the IRA has been a critical area of speculation since the law was enacted, and guidance from Treasury is still expected. Interested parties should closely examine the definition of the term under the CHIPS Act, however, as this may be indicative of where Treasury regulations will ultimately land. If these regulations mirror those in the CHIPS Act, qualification for certain IRA tax credits could be significantly limited.
4 See Mayer Brown Legal Update, Tax Credits for Electric Vehicles: What’s Changed with the US IRA?, September 9, 2022, by Daniel T. Kiely; 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 S. Connors, Warren S. Payne, and Kyoolee C. Park.