On March 31, 2023, the Internal Revenue Service (the “IRS”) bureau of the U.S. Department of the Treasury issued a guidance (Section 30D, New Clean Vehicle Credit, REG-120080-22; hereby referred to as the “Section 30D Guidance”) regarding the federal income tax credit for the purchase of qualified clean vehicles under the Inflation Reduction Act of 2022 (“IRA,” Public Law No. 117-169). The Section 30D Guidance is effective beginning on April 18, 2023, and will be finalized after considering stakeholder comments submitted by June 16, 2023.
On August 16, 2022, the IRA entered into force after US President Joe Biden signed it into law. Two of the IRA’s main components that drew attention are the following: (i) the Clean Vehicle Tax Credit, which provides USD 3,750 if vehicles meet the critical mineral requirement and the same amount if they meet the battery component requirement (up to USD 7,500 in total), and (ii) the Clean Energy Tax Credit, which provides tax credits for clean energy production facilities and the manufacturing of components thereof.
The Section 30D Guidance clarifies the criteria for eligibility for the New Clean Energy Vehicle Tax Credit by refining the contents of the IRA White Paper released by the U.S. Department of the Treasury in 2022, which detailed key component and raw material requirements for batteries.
To qualify for the full USD 7,500 tax credit under the IRA, clean energy vehicles (such as electric and hydrogen fuel cell vehicles) must meet both the critical mineral requirement and the battery component requirement. Specifically, electric vehicles that contain battery components manufactured or assembled by a foreign entity of concern (“FEOC”) beginning in 2024 or that contain critical minerals extracted, processed, or recycled by a FEOC beginning in 2025, are not eligible for the tax credit.
The Section 30D Guidance proposes a step-by-step guide to help relevant parties determine whether they meet the critical mineral requirement and battery component requirement for the green car tax credit.
1. Criteria to Meet the Critical Mineral Requirement
In order to meet the critical mineral requirement under the Section 30D Guidance, the percentage of critical minerals in a vehicle’s battery that the manufacturers mine/process in the US or in a country that has a free trade agreement (“FTA”) with the US, or recycle in North America, must be at least 40% in 2023, 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027.
To determine compliance with the critical mineral requirement, manufacturers must first identify the supply chain of each of the different minerals they use in their manufacturing process, which is a process of extracting, processing, and recycling that occurs in the same location and results in the production of constituent materials. Constituent materials are the final stage products of critical minerals before they are used in battery components, such as anode powder, cathode powder, foil, electrolyte salts, and electrolyte additives.
Once the supply chain has been identified, the critical mineral requirement will qualify if at least 50% of the value added is either (i) mined or processed in the US or a country with an FTA with the US, or (ii) recycled in North America. The 50% value-added threshold only applies in 2023 and 2024, and the threshold may be raised in the future. In addition, the scope of countries that have FTAs with the US has been expanded to include Japan, based on its recent critical minerals agreement with the US. Other countries may also be added in the future.
Battery manufacturers must also determine whether the percentage of the total value of critical minerals used in their batteries that meet the above requirements (eligible critical minerals) exceeds 40% by 2023. Manufacturers can calculate the percentage of eligible critical minerals based on the value of the critical minerals contained in the batteries of each electric vehicle, or they can average the percentage of eligible critical minerals over a period of time (e.g., monthly, quarterly, or annually) for vehicles of the same model, plant, and classification that are final assembled in North America.
2. Criteria to Meet the Battery Component Requirement
In order to meet the battery component requirement, components manufactured or assembled in North America must account for 50% of the value of the battery in 2023. This percentage will increase to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% in 2029.
To meet the battery component requirement, a qualified manufacturer (i.e., a manufacturer that has entered into a written agreement with the Secretary of the Treasury to periodically report vehicle identification numbers (“VINs”) and other data related to the manufacturing of the vehicle) will evaluate whether each battery component was manufactured or assembled in North America. A battery component is manufactured or assembled from one or more component materials that are part of a battery and are put together through an industrial, chemical, or physical assembly process. The Section 30D Guidance provides examples of battery components, including positive plates, negative plates, separators, electrolytes, cells, and modules.
If the battery components are manufactured or assembled in North America, the qualified manufacturer must then determine the incremental value of each battery component used in the battery and the incremental value of the battery components manufactured or assembled in North America. The incremental value is determined by subtracting the value of the battery components manufactured or assembled from the value of the battery components. The total incremental value of the battery components is determined by adding the incremental value of each battery component or by summing the value of each battery module.
Lastly, the qualified manufacturer determines the percentage of eligible battery parts. The percentage of eligible battery parts is the percentage of the total incremental value of battery parts manufactured or assembled in North America, which is greater than or equal to 50% in 2023. Calculating the percentage can be done through direct tracking of the actual minerals contained in a particular vehicle, or it can be averaged over a period of time (e.g., a month or a year) or by model, factory, grade, or other criteria.
Although the U.S. Department of the Treasury and the IRS have further clarified the application of the IRA in the Section 30D Guidance, there are still ambiguities, including those related to the concept of FEOCs. In addition, the guidance may be subject to further changes after the 60-day comment period. The US Department of the Treasury is expected to issue further guidance on the enforcement of the IRA in the future, including guidance on foreign entities of concern.
Taking into account IRA-related enforcement measures that have been or will be issued by the US Government, electric vehicle, battery, and related component manufacturers should strive to develop optimal supply chain strategies to meet the critical mineral requirement and critical component standard under the IRA.