The United States on Friday released proposed guidance defining a "foreign entity of concern (FEOC)" in a move to clarify its rules meant to block tax credits for electric vehicles (EVs) with battery components and critical minerals from China.

The Treasury and Energy Departments announced the long-awaited rules of the 2022 Inflation Reduction Act (IRA) as South Korean battery makers have stressed the need to clarify the FEOC requirements to address uncertainties in their overseas operations and investments.

Under the rules, beginning in 2025, an EV eligible for tax credits may not contain any critical minerals that were extracted, processed or recycled by an FEOC. Starting next year, an eligible EV may not contain any battery components that were manufactured or assembled by an FEOC.

An FEOC is viewed as being "owned by, controlled by or subject to the jurisdiction or direction" of a government of a covered foreign country, according to the Energy Department. The covered nations are China, Russia, North Korea and Iran.

A company would not be eligible for tax credits if an FEOC holds 25 percent or more of the company's board seats, voting rights or equity interest -- either directly or indirectly via one or more intermediate entities, according to the Energy Department's guidance statement.

A firm would also be ineligible if an FEOC exercises effective control over the extraction, processing, recycling, manufacturing or assembly of critical minerals and battery components under a licensing arrangement with it.

The IRA provides up to $7,500 in tax credits to buyers of EVs that met sourcing requirements and were assembled in North America. Automakers without tax benefits would find it difficult to compete against the beneficiaries of the credits.

The strict FEOC rules appear aimed at reshaping EV supply chains away from China amid an intensifying Sino-U.S. rivalry, observers said. The rules are expected to affect the South Korean EV industry that relies on China's supply chains.

The Treasury Department claimed that the IRA's clean vehicle provisions are lowering costs for consumers and strengthening energy security by building resilient supply chains with allies and partners. (Yonhap)