The law and its new electric vehicle tax credit provision have exacerbated trade tensions between the United States and other major auto-producing nations such as France, Germany, South Korea and Japan. European leaders, in particular, have publicly raised concerns with President Joe Biden that the tax credit and other IRA provisions that subsidize clean energy in the United States could spell the end of the war. of European industry while investments are being diverted to the United States. Congressional lawmakers have been unapologetic in saying they crafted the law to boost jobs and electric vehicle production in the United States.
The Treasury released a preliminary list of vehicles eligible for the credit on Thursday and expects it to grow in the coming days as they hear from more manufacturers. It might still be shorter than the car list
the Department of Energy previously said
are eligible for credit.
However, Congress has also created a separate clean utility vehicle tax credit that is not as stringent as the one for new car sales and could provide opportunities for foreign automakers. The Treasury also released answers to a list of “frequently asked questions” about the new tax credit to help manufacturers and consumers sort through the complexities.
Why countries are concerned: The Cut Inflation Act, which Biden signed into law on August 16, immediately required electric vehicles to be assembled in North America to qualify for the $7,500 consumption tax credit.
Previously, electric vehicles assembled outside of North America could qualify for the credit, although each automaker was limited to a cap of 200,000 vehicles before hitting the maximum.
The new North American assembly requirement has eliminated many foreign-made electric vehicles that were previously qualified, angering the EU, Japan and South Korea and raising the prospect of a legal challenge before the World Trade Organization.
The EU, home to major automakers like Volkswagen, BMW and Mercedes-Benz, fears the electric vehicle tax credit could divert investment from Europe to the United States. However, South Korea has an opposite concern.
Its largest automaker, Hyundai, has already announced plans to build a $5.5 billion electric vehicle facility in Georgia that won’t become operational until 2025.
South Korea has asked the Treasury for a grace period so it can continue importing credit-eligible cars until the Georgian factory starts production. However, the Treasury white paper does not address this issue, potentially leaving the automaker out in the cold.
Important Battery Provisions: Guidance released on Thursday gives foreign producers of electric vehicle batteries more hope. The IRA introduced separate requirements from January 1 for critical minerals and other battery components that Congress intended to stimulate further production in the United States. An additional provision that would come into effect in 2024 would also prevent cars containing materials and parts from China from being eligible for the tax credit.
To qualify for a portion of the tax credit, 40% of the value of critical battery minerals must be mined or processed in the United States or any country with which the United States has a free trade agreement . This level increases to 80% by 2027. Critical minerals could also be recycled in North America to qualify.
The United States currently has formal free trade agreements with 20 countries, including Canada, Mexico, South Korea, and other countries in Asia, Latin America, Africa, and the Middle East. .
The Treasury noted that the term “free trade agreement” is not defined in the IRA or any other law, allowing the department to come up with its own definition. This could potentially expand the group of countries eligible for the tax credit, including the European Union which does not have a formal trade agreement with the United States.
The Treasury said it would identify a list of criteria for what qualifies as a free trade agreement with the United States in a notice of proposed rulemaking it plans to issue in March.
The Treasury and the IRS also “expect to propose that the Secretary may identify other free trade agreements for purposes of the critical minerals requirement in the future and will assess any newly negotiated agreement for proposed inclusion. while waiting for the rulemaking process or inclusion after the rulemaking is finalized.
To qualify for the other part of the tax credit, at least 50% of the vehicle’s battery components must be manufactured or assembled in North America, beginning in 2023. This requirement will increase to 100% by 2029 .
The IRA did not provide any leeway for components manufactured or assembled in free trade agreement countries, as was the requirement for critical mineral content.
Commercial vehicle tax credits: Taxpayers who buy electric vehicles or other clean vehicles for their commercial activities can also claim a separate tax credit whose criteria are less strict than those applicable to cars sold directly to consumers.
This could potentially provide a significant market for foreign manufacturers who lease electric vehicles in the United States. However, they must ensure that the lease does not contain terms that would cause the IRS to reclassify it as a sale, the Treasury said.