The law and its new electric vehicle tax credit provisions have raised trade tensions between the U.S. and other leading automakers, including France, Germany, South Korea and Japan. European leaders, in particular, have publicly expressed concerns to President Joe Biden that the tax credit and other IRA provisions that subsidize US clean energy could be a death knell for European industry by driving investment away from the US. Lawmakers in Congress were unapologetic, saying they drafted the law to boost U.S. jobs and the production of electric vehicles.
A spokesman for the White House’s National Security Council said they did not expect the latest information from the Treasury Department to put an end to the matter.
“We are committed to understanding the concerns of our partners, including through the US-EU Task Force on the Inflation Reduction Act, chaired by senior officials from the White House and the European Commission, and with our other partners, including through bilateral channels.” Republic of Korea and Japan. These are regular talks and we expect the continuation of the talks,” said the MTN spokesman.
The Treasury released a preliminary list of vehicles eligible for the loan on Thursday, and expects it to increase in the coming days as it hears from more manufacturers. It may still be shorter than the list of cars The Ministry of Energy informed about this earlier they have the right to get a loan.
However, Congress created a separate tax credit for clean commercial vehicles that is not as strict as for new consumer vehicle sales and may provide some opportunities for overseas manufacturers through dealers who lease vehicles to consumers.
The Treasury has also published answers to a list of “Frequently Asked Questions” about the new tax credit to help producers and consumers overcome difficulties. The group Autos Drive America, which represents neither the EU nor foreign marque makers, did not immediately respond to a request for comment Thursday.
Sen. Joe Manchin (DW.V.), who played a key role in crafting the final version of the tax credits that Biden signed into law, criticized the Treasury Department’s move and urged officials to halt the implementation. Treasury’s interpretation “bows to the wishes of companies seeking loopholes and is clearly at odds with the intent of the law,” he said.
Why countries are concerned: The Inflation Reduction Act, which Biden signed into law on August 16, immediately required electric vehicles to be assembled in North America to qualify for a $7,500 consumption tax credit.
Previously, electric vehicles assembled outside of North America could qualify for the credit, though each automaker was limited to 200,000 vehicles before maxing out.
North America’s new assembly requirement has canceled many previously compliant electric cars made overseas, angering the EU, Japan and South Korea and raising the prospect of a legal challenge at the World Trade Organization.
The EU, home to major automakers such as Volkswagen, BMW and Mercedes-Benz, is concerned that the EV tax credit will siphon off investment from Europe in favor of the United States. But South Korea has the opposite concern.
Its biggest car company, Hyundai, has already announced plans to build a $5.5 billion electric vehicle facility in Georgia that won’t be operational until 2025.
The South Korean automaker has asked the Treasury for a grace period to continue importing cars that qualify for the loan until the Georgia plant starts production. However, the Treasury white paper does not address this issue, potentially leaving the automaker out in the cold. A Hyundai spokesman said the company was still reviewing the Treasury’s latest announcement.
Important battery provisions: The guidance released Thursday gives more hope to foreign electric car battery manufacturers. The IRA introduced separate requirements, effective Jan. 1, for critical minerals and other battery components that Congress intends to spur more U.S. production. The additional provision, which takes effect in 2024, would also prevent cars with materials and parts from China from qualifying for the tax credit.
To qualify for a portion of the tax credit, 40 percent of the value of the critical minerals in the battery must be mined or processed in the United States or any country with which the United States has a free trade agreement. This level will increase to 80 percent by 2027. Critical minerals can also be recycled for compatibility in North America.
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.
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.
In a notice of proposed rulemaking it plans to release in March, the Treasury said it would set out a list of criteria that would qualify as a free trade agreement with the United States.
Treasury and the IRS “also expect to propose that the Secretary may identify additional FTAs for purposes of future critical minerals requirements and to evaluate any newly negotiated agreements for proposed inclusion pending the rulemaking process. make rules”.
To qualify for another portion of the tax credit, at least 50 percent of a vehicle’s battery components must be manufactured or assembled in North America beginning in 2023. This requirement will increase to 100 percent by 2029.
The IRA did not provide any exemptions for components produced or assembled in free trade agreement countries, as was the case for the critical mineral content requirement.
Commercial vehicle tax credits: Taxpayers who purchase electric or other clean vehicles for business operations can apply for a separate tax credit with less stringent criteria than for vehicles sold directly to consumers.
This could potentially provide a large market for foreign manufacturers looking to work with dealers to lease electric vehicles in the US. However, companies should be careful that there are no terms in the lease that would prompt the IRS to recharacterize it as a sale, Treasury said.