On Thursday, February 12th, the United States Department of the Treasury and the Internal Revenue Service (IRS) unveiled a temporary guidance to enforce provisions of President Trump’s new tax law. The regulation stipulates that businesses overly reliant on equipment manufactured in China will not be eligible for federal clean energy tax credits.
This law hastens the phase-out of clean energy tax credits initiated during the Biden administration and introduces complex standards aimed at reducing America’s dependence on Prohibited Foreign Entities (PFE) from China, Russia, Iran, and North Korea.
PFE are classified into two categories: Designated Foreign Entities (directly related to the governments, citizens, or businesses of those countries) and Foreign Influence Entities (indirectly controlled or affected). This rule replaces and significantly expands upon the Biden administration’s previous Foreign Entity of Concern (FEOC) framework.
Specifically, the new tax law prohibits enterprises owned or influenced by Chinese companies from receiving relevant tax exemptions and restricts the use of components, labor, intellectual property rights, and other substantial assistance from Chinese firms. Previously, Biden’s restrictions on foreign entities were limited to tax credits for electric vehicles.
The Department of the Treasury and the IRS stated that prior to the formal regulations being issued, entities could act in accordance with these temporary rules. Taxpayers can use the provided “temporary safe harbor” mechanism in the announcement to calculate the “substantial assistance cost ratio,” including utilizing IRS-designated component cost percentage tables, supplier-provided certifications, or formulas to determine eligibility.
The announcement published on the Department of the Treasury’s website outlines the procedure for determining whether entities receive “substantial assistance” from prohibited foreign entities. Public input will be sought for 45 days on this guidance, after which formal regulations will be issued.
Despite significant growth in the domestic solar and battery manufacturing industries in recent years in the United States, these producers still heavily rely on overseas raw materials and components. These components often originate from Chinese firms, as China remains the world’s largest producer of solar components.
In addition, facing trade wars and sanctions from the United States, the Chinese Communist Party provides government subsidies to related enterprises and encourages manufacturers to establish facilities in locations like Southeast Asia to circumvent origin determinations, allowing their solar products to be priced well below those of other suppliers globally, ultimately capturing over 70% market share.
Since the passage of the One Big Beautiful Bill Act (OBBBA) in July of last year by Trump, solar and wind energy project developers and factory owners have been eagerly awaiting the implementation of relevant regulations.
At the time, Trump criticized many clean energy technologies for being overly reliant on the red supply chains of the Chinese Communist Party. The legislation not only involved tax adjustments but also expenditure reform, with the aim of ending distorted market subsidies for “unreliable foreign-controlled energy.”
In addition to targeting the solar industry in China, the United States Department of Commerce also took action on February 12th regarding a key material for battery manufacturing, anode-grade graphite. The Department of Commerce found that Chinese graphite was being sold far below fair market prices and decided to impose a 93.5% anti-dumping duty and a 67% countervailing duty on it.
Currently, Chinese companies still account for over 85% of global graphite supply, with the supply of high-quality battery-grade graphite reaching over 96%. As lithium-ion battery manufacturers expand production to meet growing power demands, global demand for graphite has sharply risen. However, many U.S. battery manufacturers, including LG Energy, still rely on imported graphite as their battery anode material.
Regarding the new regulations, Yogin Kothari, Chief Strategy Officer of the Solar Energy Manufacturers for America Coalition (SEMA), stated, “There are too many projects currently at a standstill, so having clear guidance definitely outweighs the negatives.”
Mike Carr, Executive Director of SEMA Alliance, told Nikkei Asia on February 12th, “Further clarification of relevant information will help advance the removal of Chinese influence in America’s energy supply chain. This is a top priority for the United States.”