CHIPS Act Could Define ‘Foreign Entity of Concern’ in Key Acts

On Oct 4, 2023

TL/DR –

In September 2023, the National Institute of Standards and Technology issued regulations to enforce the Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS Act) passed by Congress in 2022 to stimulate US semiconductor production. The regulations are designed to prevent funding from the CHIPS Act from indirectly benefiting specific foreign countries like North Korea, China, Russia, or Iran by imposing restrictions on activities with “foreign entities of concern” tied to these countries. The new rules may also offer insight into how the criteria for “foreign entities of concern” will be interpreted in relation to the battery grant programs of the Infrastructure Investment and Jobs Act, the Section 48D tax credit of the CHIPS Act, and the Section 30D clean vehicle tax credit of the 2022 Inflation Reduction Act.

NIST Finalizes Regulations to Implement CHIPS Act Aiming to Boost US Semiconductor Production

On September 25, 2023, the National Institute of Standards and Technology (NIST), a part of the Department of Commerce, issued final regulations ¹ implementing the Creating Helpful Incentives to Produce Semiconductors and Science Act (the CHIPS Act). This US legislation was passed in 2022 to stimulate domestic semiconductor manufacturing. The finalized rules come following NIST’s consideration of public input on proposed rules launched in March 2023.

Preventing Funding Misuse

The rules aim to prevent CHIPS Act funds from indirectly or directly benefitting foreign countries of concern — North Korea, China, Russia, or Iran — through restrictions on interactions with “foreign entities of concern” (FEOC) affiliated with these nations. These regulations may also shed light on how FEOC criteria will be applied for battery grant programs under the Infrastructure Investment and Jobs Act (IIJA), the Section 48D tax credit in the CHIPS Act, and the section 30D clean vehicle tax credit under the Inflation Reduction Act of 2022 (IRA).

Definition of “Foreign Entity of Concern”

The CHIPS Act prohibits the allocation of grants and demands the recoupment of funding provided to recipients who subsequently partner in specific joint research or technology licensing efforts with a FEOC. Furthermore, the CHIPS Act introduced a production tax credit for the manufacture of semiconductors and semiconductor manufacturing equipment. On the other hand, the IRA significantly revised and extended tax credits for new electric vehicle purchases according to Section 30D of the Internal Revenue Code. These tax credits are not available for vehicles containing battery components (beginning in 2024) and critical minerals (beginning in 2025) sourced from a FEOC.

In March 2023, the Department of the Treasury and the Internal Revenue Service proposed regulations about these IRA tax credits but did not mention “foreign entity of concern” criteria. The CHIPS Act regulations issued by NIST may indicate how the Administration intends to define FEOC for those tax credits.

Final Rule’s Definition of FEOC

The final CHIPS Act rules offer a specific definition of FEOC, which may also hint at how the term will be interpreted in the context of IRA tax credits. A FEOC is any foreign entity that fulfills certain conditions, including being designated as a foreign terrorist organization, being owned or controlled by a government of a foreign country, or being involved in activities detrimental to the US national security or foreign policy.

Potential Implications for IRA’s Tax Credits

If Treasury’s interpretation of FEOC aligns with the CHIPS Act’s regulatory definition, it could result in significant qualifications for the IRA’s tax credits. Notably, battery components and critical minerals may not be manufactured or assembled by entities that are owned 25 percent or more by entities located or having their main business operations in China, Russia, North Korea, or Iran.

The FEOC definition under the IRA has been a point of conjecture since the law’s enactment, and Treasury guidance is still anticipated. Parties interested should scrutinize the term’s definition under the CHIPS Act, as it may signal where the Treasury’s regulations will eventually end. If these regulations mirror those in the CHIPS Act, qualification for certain IRA tax credits could be considerably restricted.

¹ Dept. of Commerce, Preventing the Improper Use of CHIPS Act Funding, 88 Fed. Reg. 65600 (Sept. 25, 2023).

2 Pub. L. 117–58.

3 Pub. L. 117–169.

4 See Legal Update on IRA Tax Credits.