US IRA Announces 'Concerned Companies'... Government Says "Resolving Uncertainty, Closely Analyzing Impact"

South Korean Government Holds Policy Meeting Today

On June 27, automotive lithium-ion batteries were exhibited at the '2023 World Battery & Charging Infrastructure Expo - 2023 World Solar Energy Expo' held at KINTEX in Goyang, Gyeonggi Province. Photo by Jinhyung Kang aymsdream@

On the 1st (local time), the U.S. Department of the Treasury and the Department of Energy announced provisional guidance regarding Foreign Entities of Concern (FEOC) under the Inflation Reduction Act (IRA), which is expected to directly and indirectly impact Korean battery companies.

If a joint venture established by domestic battery companies and Chinese companies is considered an FEOC, electric vehicles produced using parts or materials procured from this company will not be eligible for subsidies in the U.S. While domestic battery companies evaluated that the provisional guidance announcement has at least removed uncertainties, they are reviewing the detailed FEOC provisions and preparing countermeasures. The Korean government also plans to hold a countermeasure meeting with domestic battery companies on the 2nd.

According to the Ministry of Trade, Industry and Energy, the provisional guidance states that a foreign company is considered an FEOC if it ▲ is established or located in a foreign country of concern or has major business sites there, or ▲ is owned, controlled, or directed by the government of a foreign country of concern.

Currently, the U.S. provides a tax credit benefit of up to $7,500 for electric vehicles that meet battery parts and critical mineral origin requirements and are finally assembled in North America. To receive this benefit, battery parts must not be procured from FEOCs starting in 2024, and critical minerals used in batteries must not be procured from FEOCs starting in 2025.

After the passage of the IRA in August last year, the U.S. Treasury Department announced the ‘Commercial Clean Vehicle Tax Credit Provision (45W)’ guidance in December 2022 and the ‘Clean Vehicle Tax Credit Provision (30D)’ provisional guidance in March 2023 to implement the IRA.

According to the IRA ‘Clean Vehicle Tax Credit Provision (30D)’, clean vehicles equipped with batteries containing minerals extracted, processed, or recycled, or parts manufactured or assembled by FEOCs are excluded from the tax credit benefits.

The provisional guidance for the ‘Clean Vehicle Tax Credit Provision (30D)’ announced in March covered overall requirements for clean vehicle tax credits but did not include specific criteria for FEOCs. The newly announced FEOC provisional guidance provides detailed definitions and implementation methods. Currently, FEOC regulations do not apply to commercial clean vehicles, which account for 53% of our clean vehicle sales in the U.S. as of October.

According to the provisional guidance announced on this day, foreign countries of concern include China, Russia, Iran, and North Korea. Governments of foreign countries of concern include ▲ central and local governments ▲ agencies and organizations of central and local governments ▲ ruling parties ▲ current and former high-ranking politicians.

If the government of a foreign country of concern directly or indirectly holds 25% or more of board seats, voting rights, or shares, it is interpreted as being owned, controlled, or directed by that government, and the company is considered an FEOC.

Additionally, if an FEOC exercises effective control over the extraction, processing, recycling, manufacturing, or assembly of critical minerals, battery parts, or components through licensing agreements, it may also be considered as ‘owned, controlled, or directed’.

This guidance not only defines FEOCs but also stipulates FEOC implementation methods. Automakers must establish a system to track critical minerals by the end of 2026. Until then, tracking procurement sources is difficult, and tracking certification for de minimis minerals (up to 2%) with low added value is exempted. The de minimis standard refers to the minimum threshold allowing procurement from Chinese companies. The de minimis mineral list is expected to be disclosed later.

So far, the industry has requested a minimum threshold allowing a small amount of parts or minerals from Chinese suppliers, considering the difficulty of tracking parts or minerals used in vehicles.

FEOC regulations will apply to battery parts from January 1, 2024, and to critical minerals from January 1, 2025. Regarding this FEOC provisional guidance, there will be a 30-day public comment period on the FEOC definition starting from the date of publication in the official gazette (December 4, 2023), and a 45-day comment period on implementation methods.

The Ministry of Trade, Industry and Energy stated, "Our battery industry has long requested the prompt announcement of FEOC guidance," and added, "We expect that this announcement will significantly improve the management and investment uncertainties for companies."

In June, the ministry submitted comments on the ‘Clean Vehicle Tax Credit Provision (30D)’ provisional guidance, requesting that clear FEOC regulations be announced promptly and that reasonable regulations be established considering the battery supply chain.

The Ministry of Trade, Industry and Energy plans to hold a public-private joint response meeting on IRA FEOC at 3 p.m. on the 2nd, chaired by First Vice Minister Jang Young-jin, to assess the impact of the newly announced provisional guidance on the battery industry. The government will collect industry opinions, submit comments, and negotiate with the U.S. side.