BDO Indirect Tax News

United States - Export control rules on semiconductors and advanced ICs updated and expanded

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has expanded the export controls on certain semiconductor and advance computing technologies supplied to entities in China. On 25 October 2023, BIS published two interim final rules (IFRs) on advanced semiconductors and related advanced computing items and semiconductor manufacturing equipment, respectively, which clarify rules announced 17 October that bolster controls on semiconductors and artificial intelligence (AI) and place 13 more entities on the BIS Entity List. The IFRs come over a year after BIS released export control rules on 7 October 2022, which addressed the Chinese government’s ongoing efforts to obtain advanced integrated circuits (ICs) for the development of AI and related technologies, as well as manufacturing equipment needed to produce advanced ICs for military applications.

The IFRs became effective on 17 November and the additions to the BIS Entity List became effective on 17 October.

The updated export controls indicate a strategic and targeted approach by BIS to regulate advanced semiconductor technology, focusing on both performance characteristics and end-use applications. The controls affect U.S. and certain non-U.S. entities.
Controls on advanced semiconductors
The 25 October IFR expands the control parameters for restricted chips, adds new measures to prevent circumvention of the rules and modifies the restrictions on activities of U.S. persons and prohibited end-uses. These controls have been expanded to include 40 countries, and for 23 of the countries, restrictions extend to companies with parent entities based those nations.

Additionally, the scope of restrictions on U.S. persons has been significantly broadened to prevent U.S. individuals and companies from providing support for Chinese advanced semiconductor activities. The rule now includes giving “support” to items that would not otherwise be subject to U.S. export controls to any prohibited country where there is knowledge that the item supported by the U.S. person will be used in the development or production of semiconductors at a facility of a prohibited entity.

The Foreign Direct Product Rule—which can affect non-U.S. companies—has been expanded to include advanced computing, restricting any transaction involving foreign-manufactured goods using covered advanced computing technology or software when a prohibited entity is a party to the transaction. The IFR expands the coverage of the advanced computing rule beyond China (and Macau, a special administrative region of China).
Controls on semiconductor manufacturing equipment
The second IFR concerns restrictions on the export of semiconductor manufacturing equipment. The changes include expanding controls against China to 22 other countries, the revision of restrictions on activities of U.S. persons and expanding the scope of licensing requirements to more countries that are subject to a U.S. arms embargo.
Additions to BIS Entity List
Thirteen Chinese entities involved in the development of advanced computing chips have been added to the BIS Entity List. Inclusion on this list means that the foreign entity may not be a party to any export, reexport and/or transfer (in-country) of nearly any U.S. product, even if the product is included on the Commerce Control List. Listed entities are also subject to restrictions under the Foreign Direct Product Rule covering foreign-produced items made using U.S. technology. As a result, foundries producing chips for such listed entities will need a BIS license before they can send chips to these entities or parties acting on their behalf.
BDO insight

The latest BIS announcement underscores the U.S. government's efforts to strengthen its regulations on advanced computing/AI and semiconductor manufacturing technology and maintain the U.S.’ competitive edge over China in these sectors. Substantial changes are made to the export controls to prevent any attempts to circumvent the rues.

More countries are brought within the scope of the controls, which will also apply to companies whose parent companies are based in prohibited countries, thus significantly limiting where these products can be sold. Companies operating in affected sectors may wish to assess how the controls impact their operations, including supply chains.

Lastly, for both IFRs, BIS allows a temporary general license that authorises (through 31 December 2025) the integration, assembly (mounting), inspection, testing, quality assurance and distribution of certain controlled items when their end use is outside the expanded destinations now subject to license requirements and by entities other than prohibited entities.

If operations involve prohibited countries, companies may wish to consider using temporary licenses to make the necessary adjustments to the supply chain. Additionally, companies should assess any "support activities" and take any needed steps to facilitate compliance with the new restrictions. Finally, companies should update their existing export controls compliance programs to incorporate these new changes.

Damon Pike
BDO in United States