On March 31, 2023, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) released a notice of proposed rulemaking on Section 30D of the Code1 (the “Proposed Regulations”), providing further guidance on the federal income tax credit relating to clean vehicles such as electric vehicles and new qualified fuel cell vehicles and the critical mineral and battery components required therein.2 The Proposed Regulations take effect April 17, 2023, and encourage stakeholders to submit comments (and/or request public hearings) on the provisions and criteria in the proposed regulations. Such comments are due by June 17, 2023.
The changes follow the enactment of the Inflation Reduction Act (the “IRA”) last August, which, by including approximately $369 billion in tax incentives for a clean green economy, significantly modified the existing clean vehicle tax credit under Section 30D and introduced new tax credits for used clean vehicles under Section 25E, clean commercial vehicles under Section 45W, and an advanced manufacturing production credit under Section 45X for taxpayers that produce certain “eligible components.” Under Section 30D, new “clean motor vehicles” that meet a critical minerals requirement are eligible for a $3,750 tax credit, and vehicles that meet a battery components requirement are eligible for a $3,750 tax credit (a total of $7,500 available credit).3
To satisfy the critical minerals requirement, a certain percentage of the critical mineral components of the electric vehicle battery must be either (i) extracted or processed in the United States or in a country with which the United States has a qualifying free trade agreement in effect, or (ii) recycled in North America.4 To satisfy the battery components requirement, a certain percentage of the value of components contained in the battery must be manufactured or assembled in North America.5
Under the IRA, Treasury was tasked with issuing regulations or guidance on these provisions no later than December 31, 2022. On August 16, 2022, several days after the IRA was signed into law, Treasury and the IRS released initial information on the changes to 30D tax credits, providing information in broad strokes on how the North America final assembly requirement should work. In the following months, Treasury and the IRS solicited and reviewed public comments and released Revenue Procedure 2022-42, outlining reporting requirements for manufacturers and sellers of new or previously owned clean vehicles. In December 2022, Treasury and the IRS released a white paper on the anticipated direction of forthcoming proposed guidance on the critical mineral and battery component requirements for the new clean vehicle credit under section 30D (the “White Paper”), which previewed some of the upcoming changes and indicated their plan to release the delayed guidance by March 2023. In addition to the White Paper, Treasury and the IRS released Notice 2023-1, which contained certain definitions of terms in Section 30D.
While the Proposed Regulations closely track the White Paper, they also include some new rules. For example, the Proposed Regulations contain the three-step approach to determining the percentage of the value of the critical minerals in the subject battery and the four-step approach for certifying that an electric vehicle meets the battery component requirement from the White Paper. The Proposed Regulations also provide that manufacturers must determine the value of critical minerals and battery components using the transfer pricing principles (arm’s length price paid by an unrelated purchaser) of Section 482.
To calculate the critical minerals requirement, the taxpayer must first document the supply chain (referred to in the Proposed Regulations as the “procurement chain”) for each individual critical mineral. The Proposed Regulations state that when determining the share of the value of the critical mineral being considered, the entire value of the critical mineral will be considered to have met that criteria if 50% or more of the value of the mining, extraction or processing takes place in the United States or in an FTA partner country. Alternatively, the entire value of the critical mineral will be considered to have met that criteria if 50% or more of the value added to the critical mineral via processing takes place in the United States or in an FTA partner country. This alternative is described as a transition rule that will be in effect for 2023 and 2024; beginning in 2025, Treasury will require more stringent documentation. The Proposed Regulations explicitly request public feedback on this rule and how Treasury should implement a more stringent rule in the future.
Once the manufacturer has properly documented the value of the critical minerals extracted or processed in the United States or an FTA partner country, the manufacturer uses that value to calculate qualifying critical mineral content. This calculation is the share of the total value of all critical minerals incorporated in the battery accounted for by the critical minerals extracted or processed in the United States or an FTA partner country. If that share meets or exceeds the minimum requirement for the relevant year than the critical mineral criteria is satisfied.6 The Proposed Regulations provide manufacturers the option of performing this calculation for each individual battery or the option to average the qualifying critical mineral content over a limited period of time. The Proposed Regulations explicitly request public comment on how such averaging calculation should be performed.
With regard to the calculations for the battery component criteria, the Proposed Regulations identify the battery components that would be subject to the calculation if such components are manufactured in North America. More specifically, the Proposed Regulations define battery components as including cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell and battery modules. Components upstream in the supply chain from these components are defined as “constituent materials.” Constituent materials are not included in the calculation and thus presumably could be sourced from outside of North America. To satisfy the criteria, the manufacturer calculates the “incremental value” of the battery components manufactured in North America and if the share of the qualifying battery components to the total aggregated value of all components exceeds the minimum requirements for that year, then the battery component criteria is satisfied. Analogous to the criteria for the critical mineral requirement, a manufacturer may perform this calculation for each individual battery or may average the calculation over a limited period of time. Treasury has also requested public comment on how the averaging calculation should operate for the battery component criteria.
Further, to determine whether or not a subject critical mineral will qualify under the IRA, the Proposed Regulations confirm that the phrase “country with which the United States has a free trade agreement in effect” means the countries with which the United States has comprehensive free trade agreements that have been approved by Congress and incorporated into statute.7 In addition, the Proposed Regulations also propose that Japan should be included as a country that has a Section 30D “free trade agreement,” resulting from the US-Japan critical minerals agreement signed on March 28, 2023.8 This agreement differs from the above-referenced comprehensive free trade agreements, as its provisions and commitments have not been enacted into statute. No other countries beyond those named in the Proposed Regulations currently meet the free trade agreement criteria. To further complicate the analysis, the Proposed Regulations provide that Treasury also will identify additional countries in the future based on the whether an agreement (1) reduces or eliminates trade barriers on a preferential basis; (2) commits the parties to refrain from imposing new trade barriers; (3) establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections); and/or (4) reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions. Treasury and the IRS may also amend the list to add certain countries that it finds have successfully met the above criteria, or delete a country if such country’s free trade agreement has expired, terminated or been modified. Also important to note is that the Biden Administration has indicated that it is currently negotiating a “critical minerals agreement” with the EU. As such, it is reasonable to assume that once final, this agreement will be deemed to qualify as a Section 30D “free trade agreement.”9
The Proposed Regulations are silent on certain key issues, including the interpretation of “foreign entities of concern” under Section 30D(d)(7). Instead, the Proposed Regulations state that Treasury and the IRS “intend to issue guidance with respect to Section 30D(d)(7) at a later date.” As discussed in a prior Legal Update, beginning in 2024, the Section 30D credit will be unavailable to vehicles that contain any battery components that were manufactured or assembled by a foreign entity of concern. In addition, beginning in 2025, a vehicle’s battery may not contain any critical minerals sourced from a foreign entity of concern.10 As these restrictions may be challenging to meet, further guidance on what qualifies as a “foreign entity of concern” will be critical in determining the eligibility of vehicles for the Section 30D credit.
4 See Mayer Brown Legal Update, Tax Credits for Electric Vehicles: What’s Changed with the US IRA?, September 9, 2023, by Daniel T. Kiely. For the critical minerals requirement, the thresholds are 40% for vehicles placed in service after Treasury issues guidance and during 2023, 50% for vehicles placed in service in 2024, 60% for vehicles placed in service in 2025, 70% for vehicles placed in service in 2026, and 80% for vehicles placed in service in 2027 through 2032.
5 For the battery components requirement, the thresholds are 50% for vehicles placed in service after Treasury issues proposed guidance and during 2023, 60% for vehicles placed in service in 2024 or 2025, 70% for vehicles placed in service in 2026, 80% for vehicles placed in service in 2027, 90% for vehicles placed in service in 2028, and 100% for vehicles placed in service in 2029 through 2032.
6 As stated above, the thresholds are 40% for vehicles placed in service after Treasury issues guidance and during 2023, 50% for vehicles placed in service in 2024, 60% for vehicles placed in service in 2025, 70% for vehicles placed in service in 2026, and 80% for vehicles placed in service in 2027 through 2032.
7 These countries are Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.
9 See Mayer Brown Legal Update, Critical Minerals and Electric Vehicle Battery Sourcing Requirements Under the IRA: Waiting with Bated Breath, March 24, 2023, by Meaghan S. Connors, J. Paul Forrester, Daniel T. Kiely, Ian Coles, Warren S. Payne, and Kevin L. Shaw.