On December 1, the Department of Energy (DOE) and the Department of the Treasury (Treasury) published highly-anticipated proposed rules that will significantly impact China’s and other covered nations’ roles in the battery supply chain for electric vehicles (EVs) sold to U.S. consumers. The proposed DOE Interpretive Rules and proposed Treasury Regulations interpret the term “foreign entity of concern” (FEOC) in the same manner for purposes of the Battery Manufacturing and Recycling Grant program under the Bipartisan Infrastructure Law and the EV credit under section 30D of the Internal Revenue Code introduced by the Inflation Reduction Act (IRA). The proposed rules take a more nuanced approach than the proposed and final rules that appeared in the context of the CHIPS and Science Act over the past year (discussed here, here, and here), but nevertheless purport to adopt bright-line rules. As we have previously noted, adopting a different approach to such term in section 30D is justified to balance the IRA’s dual policy goals of onshoring and “friendshoring” the U.S. EV battery supply chain while making credits sufficiently available to accelerate the electrification of the U.S. consumer vehicle fleet.

The balance struck in the proposed rules would generally preclude incentives for vehicles containing battery components or critical minerals produced in China. But recognizing the global integration of the automotive industry, the proposed rules would not deny such incentives for vehicles with components or critical minerals produced outside of China by subsidiaries of Chinese companies—or by properly-structured joint ventures or collaborations with such companies (or their Chinese parents)—that are not ultimately owned or controlled by the Chinese government. To qualify for the credits, such vehicles would still need to meet section 30D’s other content requirements for battery components produced in North America and critical minerals produced in the U.S. or countries with which the U.S. has a free trade agreement. But the credits would not be categorically disallowed because of the presence of Chinese-owned companies in the battery supply chain.

To further inform their approach, DOE and Treasury are encouraging industry participants and stakeholders to submit comments on the proposed rules.

How the Proposed Rules Work

Pursuant to section 30D, FEOCs must be generally excluded from a vehicle battery’s supply chain in order for the vehicle to be potentially eligible for the (up to $7500) tax credit. Specifically, section 30D(d)(7) excludes from credit eligibility vehicles that are:

  • placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle . . . were extracted, processed, or recycled by a foreign entity of concern; or
  • placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle . . . were manufactured or assembled by a foreign entity of concern.

Section 30D(d)(7) defines “foreign entity of concern” by cross-reference to Section 40207(a)(5) of the Infrastructure Investment and Jobs Act. Most relevant is clause (C) of that definition, by which an FEOC includes any “foreign entity” that is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a covered nation (as defined in section 2533c(d) of title 10) [currently China, Russia, North Korea, and Iran, though our comments focus on China given its dominance in the EV battery industry].” DOE’s proposed rules, which are crossed-referenced by Treasury’s proposed rules, define “foreign entity,” “subject to the jurisdiction of,” “owned by, controlled by, or subject to the direction of,” “government of a foreign country,” and additional terms used therein.

Below we list these key definitions and provide high level observations regarding the DOE and Treasury rules.

Key Definitions

“Foreign entity”:

(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 in paragraphs (i)–(iii).

“Subject to the jurisdiction of”:

(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.

“Owned by, controlled by, or subject to the direction of”:

(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.

“Government of a foreign country”:

(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.

“Senior foreign political figure”:

(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”:

an individual with substantial authority over policy, operations, or the use of government-owned resources.

High Level Observations on the FEOC Definition and Implementation in the Proposed Rules

Similar to the Commerce regulations under 15 CFR § 231.104(c), if a foreign entity is incorporated or domiciled in, or has its principal place of business in, a covered nation (e.g., China), the entity is an FEOC because it is “subject to the jurisdiction” of a covered nation government. In addition, a foreign entity outside of a covered nation is “subject to the jurisdiction” of a covered nation government (and thus an FEOC) with respect to certain critical minerals, components, or materials of a battery if the entity engages in the extraction, processing, or recycling of such critical minerals; manufacturing or assembly of such components; or processing of such materials in a covered nation.

Also similar to the Commerce regulations, the threshold for precluded ownership and control is 25 percent or more of the entity’s board seats, voting rights, or equity interest cumulatively held. Detailed rules are provided for determining direct and indirect ownership and control.

Unlike Commerce’s regulations, an entity is not deemed an FEOC merely because 25 percent or more of its outstanding voting interest, board seats, or equity interest is held by one or more other FEOCs. In short, a subsidiary of an FEOC is not automatically an FEOC.

On the other hand, in an expansion from Commerce’s regulations, an entity is an FEOC with respect to certain critical minerals, components, or materials of a battery if it enters into a licensing arrangement or other contract with an FEOC that is “owned by, controlled by or subject to the direction of” a government of a covered nation and if the agreement entitles the FEOC to exercise effective control over the first entity’s production of such critical minerals, battery components, or battery materials.

Detailed rules are provided to define a government of a foreign country. Notably, such term includes current and former senior foreign political figures, which are defined as certain senior officials of a government or dominant or ruling political party and their immediate family members. Specifically, with respect to the Chinese Communist Party, the explanation to the proposed interpretation states:

In the specific context of the CCP in the PRC, DOE considers its interpretation of “government of a foreign country” to include 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 because they qualify as “senior foreign political figures.”

The proposed rules aim to provide bright lines for determining whether battery components and applicable critical minerals are FEOC-compliant. OEMs and their contractors must conduct due diligence of battery components and applicable critical minerals based on industry standards of tracing battery materials. During a transition period, an exception is provided for “non-traceable battery materials” (which are generally certain low-value battery materials that are commingled during the production process). Also during a transition period, parties are allowed to determine the applicable critical materials and associated constituent materials of a battery cell using an allocation-based method.

Finally, the proposed rules require qualified manufacturers to provide information to the IRS to establish a compliant-battery ledger each calendar year and to attest to the number of FEOC-compliant batteries. Guidance is also provided regarding the consequences of inaccurate attestations, certifications, or documentation and regarding a method to cure such inaccuracies in certain circumstances.

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While the new guidance reflects a carefully coordinated interagency effort by the Biden Administration to provide a clear roadmap for OEMs and consumers to produce and purchase FEOC-compliant EVs, comments are invited and the Administration remains open to considering further clarifications that would strengthen the dual goals of the EV incentives.

Stakeholders should consider submitting comments—due January 3 (for DOE’s proposed rules) and January 18 (for Treasury’s proposed rules)—and closely follow the development of these rules as they are promulgated.