Considerations for Foreign Entity of Concern (FEOC) Guidance

New Foreign Entity of Concern (FEOC) restrictions, which apply to multiple tax credits including the Investment and Production Tax Credits (45Y and 48E) and the advanced manufacturing credit (45X) among others, require clear, administrable guidance from the U.S. Department of Treasury to avoid unintentionally limiting U.S. energy developers’ ability to compete domestically and internationally. While the new FEOC restrictions were passed in order to prohibit the payment of tax credits to certain prohibited foreign entities (PFEs) or other firms receiving material assistance from PFEs to promote U.S. competitiveness, this original intent will only be realized if FEOC definitions and compliance processes are sufficiently clear and administrable to support U.S. innovation. 

As Treasury works on FEOC guidance, several factors warrant consideration in designing a system to effectively administer FEOC rules: 

• Some materials, subcomponents, and manufactured products will necessarily be sourced outside of the United States, and it may present challenges to fully track these supply chains.  

• Some technologies rely on a broad set of subcomponents and materials, so understanding at what component/subcomponent level to assess FEOC compliance will be necessary. 

• As industry markets are growing, investor certainty is paramount. Clear definitions, reporting frameworks, and parameters with examples of how provisions will be implemented will help give that certainty.  

To design a workable FEOC compliance process, CATF recommends:  

• Narrow definition of “effective control” 
  • Many U.S. firms or their suppliers use license agreements with FEOCs (e.g., Chinese firms) but these arrangements do not constitute effective control by the FEOC. Treasury should define “effective control” clearly and narrowly so as to avoid undue restrictions on arrangements that do not genuinely compromise the security objectives of the statute. 
  • Section 7701(a)(51)(D)(ii) sets clear parameters for defining effective control and directs Treasury to adopt guidance more specifically defining when and whether a given contractual or licensing arrangement with the PFE constitutes effective control by that PFE. Treasury retains discretion to determine, for example, what constitutes sufficiently “similar” agreements or arrangements to those in subclauses (II) or (III), or what constitutes an “unrestricted” contractual right as specified in subclause (II). 
  • Treasury should provide examples in guidance and/or regulations illustrating when licenses and contracts constitute effective control as well as examples of when they do not. 
  • Example: U.S. company licensing the physical design and configuration of a nuclear fuel element from a foreign company would not constitute effective control by that foreign company. 

• Clear reporting framework 
  • Treasury should specify what information will be required to demonstrate FEOC compliance, including guidance on supplier certifications in the near term and whether reporting domestic production of the percent of cost of components will be sufficient for reporting (vs. reporting of the non-U.S. percentage). 

• Substantial transformation rule 
  • The availability of multiple tax credits depends on the determination of whether a product is “mined, produced, or manufactured by” a prohibited foreign entity. It would be helpful to clarify whether or under what circumstances components further down the supply chain would be attributable to such entities.   
  • Treasury should clarify that if a system component or manufactured product is assembled, integrated, and licensed by a non-FEOC, the cost of such component should not be attributable to a FEOC even if some subcomponents originated from a FEOC. 
  • Example: Japanese forging using some materials sourced from FEOCs, but final quality assurance and integration is in Japan or the U.S.  

• Clarify and limit credit recapture risks 
  • Upon notice of violation by the firm claiming the credit or Treasury, the firm should be given a time period to correct the violation, if possible to correct. 
  • Lookback periods should be limited where authorized to no more than 3 years. 

The U.S. has the opportunity to accelerate deployment of clean energy technologies like advanced nuclear energy and next-generation geothermal. These recommendations will ensure that FEOC guidance is clear while also not hindering U.S. innovation and competitiveness.