US Treasury Department Publishes Proposed Guidance on Clean Vehicle Tax Credits

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On April 17, 2023, the US Department of the Treasury ("Treasury") and the Internal Revenue Service ("IRS") published the Notice of Proposed Rulemaking for the Section 30D New Clean Vehicle Credit (the "Proposed Rules")1 to the Federal Register, implementing the critical mineral and battery component requirements of the Inflation Reduction Act's ("IRA") clean vehicle subsidies. Manufacturers must certify to the government that their vehicles meet these requirements for buyers to receive the relevant clean vehicle tax credits. Treasury previewed the plans in a December 2022 white paper, with which the newly published Proposed Rules broadly align,2 and circulated a draft of the Proposed Rules on March 31.

Critical Minerals Requirement

Clean vehicles that satisfy the Critical Minerals Requirement will receive a tax credit of up to $3,750 (scaling upward based on the size of the battery). To satisfy the requirement, a share of the critical minerals contained in the vehicle's battery must be "extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect," or be "recycled in North America." The Proposed Rules include key definitions, steps, and calculations necessary to determine compliance with this requirement. The proposed steps are as follows:

  • Step 1: Determine the procurement chain for each critical mineral.

Each critical mineral procurement chain needs to be identified and evaluated separately. The procurement chain is "a common sequence of extraction, processing, or recycling activities that occur in a common set of locations, concluding in the production of constituent materials" (Proposed Section 1.30D-3(c)(14)).

  • Step 2: Evaluate each procurement chain for compliance with the Critical Minerals Requirement.

To be treated as a "qualifying critical mineral," minerals procured must be either "extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect" or "recycled in North America." If 50% of the value added of mining, processing, or recycling of the mineral occur in the covered economies, then it is a "qualifying critical mineral." The Proposed Rules refer to this as the "50% of value added test." This test will apply for vehicles entering service in 2023 and 2024. Starting in 2025, Treasury will apply a more stringent test, which has not yet been determined (the Proposed Rules invite public input on what the new test should be).

  • Step 3: Calculate the percentage of the value of qualifying minerals contained in the final battery.

To qualify for the subsidy, the battery must contain a certain percentage of "qualifying critical mineral content" (proposed Section 1.30D-3(c)(18)). The Proposed Rules set out specific procedures for carrying out this test, which would divide the "total value of qualifying critical minerals" from step 2 by the "total value of critical minerals." The required share of "qualifying critical mineral content" starts at 40% for 2023 and increases by 10 percentage points a year until it reaches 80% at the end of 2026.

The definition of "free trade agreement" for the purpose of step 2 has been one of the most important questions related to implementation of the EV tax credit. Proposed Section 1.30D-3(c)(7) includes an definition covering any country with which the United States currently has a comprehensive free trade agreement. It would also allow the Treasury Secretary to extend coverage to other countries with which the United States has non-comprehensive trade agreements. These non-comprehensive agreements must meet certain criteria described in Proposed Section 1.30D-3(c)(7)(i). The Proposed Rules designate Japan as qualifying under this second criteria. Japan signed a critical minerals trade agreement with the United States on March 28, 2023.3 A similar agreement is currently under negotiation with the EU. Based on the language of the Proposed Rules, the conclusion of that agreement would lead to the Treasury designating the EU as qualifying under this section.4 Agreements with other countries may follow.

Battery Component Requirement

The second component of the tax credit, which also provides up to $3,750, requires that a certain share of the battery's components be manufactured or assembled in North America. The required percentage starts at 50% in 2023 and increases to 100% by 2029. The Proposed Rules put forward a four-step process for determining whether a car meets the Battery Component Requirements.

  • Step 1: Determine whether components are manufactured or assembled in North America.

Manufacturers must identify "North American battery components" as the first step of the process. Proposed Section 1.30D-3(c) contains the definitions for batteries, cells, components, manufacturing, and assembly for this purpose.

  • Step 2: Determine the incremental value of the North American components.

If the battery components qualify as "North American battery components" according to the definitions in step 1, the manufacturer should determine their incremental value. The sum of these incremental values represents the "total incremental value of North American battery components."

  • Step 3: Find the total incremental value of all components.

The manufacturer will then add together the total incremental value of all battery components to determine the "total incremental value of battery components."

  • Step 4: Calculate that share of value that qualifies.

The manufacturer would then divide the "total incremental value of North American battery components" by the "total incremental value of battery components" to find the "qualifying battery component content” share. Manufacturers would use this share to determine whether the car qualifies for the Battery Component tax credit.

Another important question relates to Treasury's differentiation between battery inputs that are subject to the Critical Minerals Requirement (which can be made in any free trade agreement partner country) and battery components that are subject to the Battery Component Requirement (which can be made only in North America). As proposed in the December 2022 white paper, Treasury has decided to classify "constituent materials" under the Critical Mineral Requirement instead of under the Battery Component Requirement. "Constituent materials" are "materials that contain applicable critical minerals and are employed directly in the manufacturing of battery components," which are then assembled into battery components. "Constituent materials" includes "powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives."

Qualifying Clean Vehicles

To qualify for either part of the Section 30D credit, manufacturers must first establish that the vehicle they are selling is a "clean vehicle" subject to the definition in the amended section 30D(d). Clean vehicles must meet certain general characteristics, be made by a company that is reporting the necessary vehicle information to the Treasury (a "qualifying company"), and must have had "final assembly" in North America (defined as the United States, Mexico, and Canada). This final assembly rule contrasts with the Section 45W credit for commercial clean vehicles, for which North American assembly is not required.

Section 30D(d)(5) defines final assembly as "the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle." The Proposed Rules instruct taxpayers to rely on either the plant of manufacture that is reported in the Vehicle Identification Number ("VIN") or the final assembly point that is reported on the vehicle's labeling. The final assembly point described in vehicle labels, according to 49 CFR 583.5, is the location "where a new passenger motor vehicle is produced or assembled from passenger motor vehicle equipment and from which such vehicle is delivered to a dealer or importer in such a condition that all component parts necessary to the mechanical operation of such automobile are included with such vehicle whether or not such component parts are permanently installed in or on such vehicle."5

Exclusions from the Subsidy

The IRA introduces several new limitations to the existing tax credit system. High-income taxpayers ($150,000 for single filer, $225,000 for head of household, $300,000 for joint filers) cannot claim the credit. Higher cost vehicles also cannot qualify. The price limit is $80,000 for vans, pickup trucks, and SUVs, and $55,000 for cars. The IRA also, however, expands the coverage of the clean vehicle tax credit by removing the previous requirement that credits be phased out for particular manufacturers after the sale of 200,000 vehicles.

The IRA also restricts companies related to "foreign entities of concern" from receiving the subsidy. A foreign entity of concern includes, among other things, any foreign entity that is "owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation [China, Russia, Iran, or North Korea]."6 For the Battery Component Requirement, tax credits will be prohibited if the battery was manufactured or assembled by a foreign entity of concern. This prohibition will be effective for vehicles placed into service after December 31, 2023. For the Critical Minerals Requirement, the credit will be prohibited if the battery contains "any" critical minerals that are "extracted, processed, or recycled" by a "foreign entity of concern." This prohibition would take effect after December 31, 2024. This phase-in period appears designed to give companies time to diversify their critical mineral sourcing away from China. Treasury will elaborate on these restrictions more in future guidance.

Timeline and Public Comments

The relevant tax credits will apply to vehicles that enter service after April 17, 2023, the day the Proposed Rules were officially published in the Federal Register. On that date, the list of vehicles that qualify for tax credits on will be updated to reflect the new requirements. The government will add new vehicles to the list every month as manufacturers submit qualifications.

The Notice of Proposed Rulemaking provides 60 days (ending on June 16, 2023) for the public to submit comments and request public hearings. Comments can be submitted through Federal eRulemaking Portal at Treasury may make additional changes to the proposed rules after reviewing the public's responses.

1 The Federal Register notice can be found here.
2 Treasury's December 2022 white paper can be found here.
3 The US-Japan Critical Minerals Agreement can be found here.
4 The Leaders' Statement endorsing an EU-US critical minerals agreement negotiation can be found here.
5 For the full regulation on vehicle origin labels see here.
6 Based on 42 USC. § 18741(a)(5).
7 The rules can be found under Docket ID IRS_FRDOC_0001-2102 here.

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