On March 31, 2023, the Treasury Department and Internal Revenue Service (IRS) issued proposed regulations implementing the section 30D clean-vehicle tax credit enacted as part of the Inflation Reduction Act (IRA). The guidance further clarifies the strict material-sourcing and production requirements that manufacturers must satisfy in order for consumers to receive the full $7,500 credit for the purchase of a clean vehicle. With these regulations, the Treasury Department and IRS aim to “lower costs for consumers, build a resilient industrial base and spur manufacturing in the United States.”
The proposed regulations will establish new manufacturing requirements on electric vehicles (EVs) in order for purchasers to qualify for the tax credit in an attempt to bolster domestic critical-mineral and battery-component supply chains. Businesses involved in the EV supply chain, either directly or indirectly, should engage now on these proposed regulations to ensure the Biden administration considers all potential concerns in the ongoing implementation of this consumer tax credit.
To be eligible for part or all of the tax credit, a manufactured vehicle must meet several base requirements outlined in the IRA’s statutory definition of a “new clean vehicle”:
- The vehicle must undergo final assembly in North America by a “qualified manufacturer” that enters into a written agreement with the IRS;
- The manufactured suggested retail price (MSRP) must not exceed $55,000 ($80,000 for a van, pickup truck or sport utility vehicle);
- The vehicle must be acquired for use or lease by the taxpayer and not for resale;
- The vehicle must be treated as a motor vehicle for primary use on public streets, roads and highways;
- The vehicle must have a gross vehicle weight rating of fewer than 14,000 pounds;
- The vehicle must be propelled by an electric motor with a battery capacity of not less than 7 kilowatt-hours and capable of being recharged; and
- The person selling the vehicle to the consumer must furnish a report to the consumer, with a copy submitted to the IRS.
Beginning in 2024 and 2025 respectively, vehicles containing critical minerals or battery components from a “foreign entity of concern” will not qualify for any amount of the tax credit. The term “foreign entity of concern” has not been defined to identify specific entities, although it is expected to include the governments of China, Russia, Iran and North Korea. The Treasury Department plans to expand on these rules in future guidance.
If the manufacturer complies with the above requirements, purchased vehicles may be eligible for some portion of the section 30D tax credit depending on the manufacturers’ compliance with (i) specified critical-mineral requirements and (ii) battery-component requirements. Consumers are eligible for up to $3,750 for vehicles meeting each of these individual requirements, allowing for a total maximum credit amount of $7,500 per vehicle.
For vehicles to qualify under the critical-minerals requirement, manufacturers must meet material-sourcing requirements for several specified metals. The IRA defines these critical minerals, which are essential to constructing EV batteries, as aluminum, lithium, cobalt, manganese, nickel and graphite. Required domestic sourcing of these minerals is intended to help secure a reliable domestic supply of these materials and help meet climate and national security goals. To satisfy the critical-minerals aspect of the tax credit, an applicable percentage of the total value of critical minerals used in the vehicle battery must be extracted or processed in the United States or a country with which the United States maintains a free-trade agreement, as defined below. The requirement can also be satisfied if the applicable percentage of critical minerals are recycled in North America. The critical-minerals applicable percentage is phased in as follows:
- For 2023, the applicable percentage is 40%
- For 2024, the applicable percentage is 50%
- For 2025, the applicable percentage is 60%
- For 2026, the applicable percentage is 70%
- After 2026, the applicable percentage is 80%
The proposed regulations also outline a three-step process to determine the percentage of value: (1) determine procurement chains, (2) identify qualifying critical minerals and (3) calculate qualifying critical-mineral content.
In announcing the proposed regulations, the Treasury Department and the IRS noted that “more secure and resilient supply chains are essential” and listed the following free-trade-agreement countries as qualifying under the proposed regulations: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore (additional countries, such as European Union (EU) member countries, are expected to be added to the list).
To satisfy the battery-component portion of the credit, an EV manufacturer must manufacture or assemble a specified percentage of the total value of its battery components in North America. The battery-component applicable percentage is phased in as follows:
- For 2023, the applicable percentage is 50%
- For 2024 and 2025, the applicable percentage is 60%
- For 2026, the applicable percentage is 70%
- For 2027, the applicable percentage is 80%
- For 2028, the applicable percentage is 90%
- After 2028 the applicable percentage is 100%
The determination of the battery components’ percentage value is based on a four-step process under the proposed regulations: (1) identify battery components that are manufactured or assembled in North America, (2) determine the incremental value of each battery component, including North American battery components, (3) determine the total incremental value of battery components and (4) calculate the qualifying battery-component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.
The proposed regulations have been met with significant criticism, despite Treasury Secretary Janet Yellen’s insistence that this guidance will play a crucial role in “creating American manufacturing jobs and strengthening our energy and national security.” John Podesta, the senior advisor to the president for clean energy innovation and implementation, said automakers are “kind of scrambling” to meet these new rules.
Following the release, Sen. Joe Manchin (D-WV) expressed his irritation over the Treasury Department’s broad definition of free-trade agreements under the proposed regulations, which he believes is contrary to his intentions for the domestic-sourcing requirements and will reduce incentives to expand domestic EV manufacturing. In his statement, Manchin said, “[i]t is horrific that the administration continues to ignore the purpose of the law, which is to bring manufacturing back to America and ensure we have reliable and secure supply chains.” Moreover, Manchin also claimed he intends to take legal action against the Treasury Department over what he believes is an ongoing disregard for congressional intent. In a joint statement released last week, Senate Finance Committee Chairman Ron Wyden (D-OR) and House Ways and Means Ranking Member Richard Neal (D-MA) echoed Manchin’s concerns, while also critiquing the Treasury Department’s adherence to the IRA’s statutory language as “unacceptable.”
Several Republican lawmakers have also expressed displeasure toward the Treasury Department’s willingness to circumvent congressional approval in the unilateral creation of new quasi-free-trade agreements. In a hearing last week, House Ways and Means Chairman Jason Smith (R-MO) raised specific concerns that new agreements with Japan and the EU lacked sufficient bans on the use of critical minerals mined with forced labor in China and the Democratic Republic of the Congo.
Despite criticism from U.S. lawmakers, EU officials have taken the position that the United States is applying the IRA-mandated Made-in-America requirements too restrictively and are continuing to negotiate toward a critical-minerals agreement like the one reached between the United States and Japan just prior to the release of the proposed regulations.
Analysis and Next Steps
An updated list of eligible vehicles is expected after April 17, 2023—the date on which the critical-minerals and battery-components requirements begin to apply. To date, only 21 EV models in production are likely to qualify for credits, according to a senior Treasury Department official—although the loosened free-trade definition may help expand the number of eligible vehicles. Earlier this week, Ford and Chrysler-parent Stellantis announced that a majority of the companies’ EVs would become ineligible to receive the full $7,500 tax credit after the new proposed regulations take effect on April 18, 2023. Also of note, General Motors announced that while they currently only have a single model that would qualify for the full credit, they are expecting to roll out three additional qualifying vehicles by the end of the year.
In the coming months, the Treasury Department and IRS will release additional guidance on foreign entities of concern, which is expected to encourage EV-technology businesses to relocate from China to the United States and encourage additional domestic battery construction. That guidance is also likely to affect joint ventures between U.S. car companies and foreign entities in the manufacturing process. However, it is unlikely that comprehensive guidance on this issue will be released until closer to their effective dates for the limitation on foreign entities of concern (i.e., 2024 for battery components and 2025 for critical minerals).
The legality of the proposed regulations’ treatment of new quasi-foreign-trade agreements has also been called into question. It remains to be seen whether U.S. businesses will mount a legal challenge to the preferential treatment of these new trade agreements and whether the plaintiffs would have standing in such a case. To date, some U.S.-based battery manufacturers have been vocal in opposition to the Biden administration’s liberal interpretation of the foreign-trade-agreement exception.
The Treasury Department and IRS’s promulgation of the proposed rules trigger the critical-mineral and battery-component requirements, which will now apply to clean vehicles placed in service after April 17, 2023. Other provisions of the tax credit have a delayed effective date and will take effect when the rules are finalized.
Publication of the proposed rule on April 17, 2023, starts a 60-day comment period, with final regulations following once the Treasury Department and IRS review and respond to comments received, albeit not on any statutorily defined timeline. For support drafting comments or counsel on how this guidance may affect your organization, please contact the authors of this alert.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING NEW IRS AND TREASURY GUIDANCE ON IRA PROVISIONS RELATED TO ELECTRIC VEHICLES. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.