On December 29, 2022, Treasury released a white paper indicating the anticipated direction of proposed guidance on the critical mineral and battery component requirements for the new clean vehicle credit under section 30D. Treasury intends to publish proposed guidance in March 2023, and after its publication, the section 30D credit will be available only if a vehicle satisfies one of these requirements ($3,750 for satisfying one requirement and $7,500 for satisfying both requirements).
In addition to the white paper, the IRS issued Notice 2023-1 which provides proposed definitions of certain terms relevant for the section 30D credit.
White Paper on “Anticipated Direction of Forthcoming Proposed Guidance on Critical Mineral and Battery Component Value Calculations for the New Clean Vehicle Credit”
As described in more detail below, to determine if a vehicle satisfies the critical mineral and battery component requirements, one must determine (1) if a threshold percentage of the value of the critical minerals in a vehicle’s battery is extracted or processed in the United States or “free trade agreement” partner countries or recycled in North America and (2) if a threshold percentage of the value of the vehicle’s battery components is manufactured or assembled in North America.
Generally, to determine the value of critical minerals and battery components, the white paper provides that manufacturers must use the arm’s length price that was paid or would be paid by an unrelated purchaser using the transfer pricing principles of Internal Revenue Code Section 482. To determine the value of the critical minerals, the manufacturer may select any date on or after the final processing or recycling step for the critical minerals, but that date must be applied to all materials contained in the battery. To determine the value of the battery components, the manufacturer may select any date on or after the final manufacturing or assembly step for the battery components, but that date must be applied to all battery components contained in the battery. For each of the critical minerals and the battery component percentage calculations, the manufacturer may average the percentage calculations over a period of time with respect to vehicles from the same model line, plant, class, or some combination thereof for vehicles, the final assembly of which occurs in North America.
Critical Minerals Requirement
The section 30D credit requires that, for any EV placed in service in 2023 (after the publication of proposed guidance expected in March 2023), 40 percent of the value of the critical minerals in the EV’s battery must be either extracted or processed in the United States or in any country with which the United States has a free trade agreement (FTA) in effect, or recycled in North America. This amount increases to 50% in 2024, 60% in 2025, 70% in 2026, and 80% after 2026.
It is anticipated that proposed guidance will provide the following three steps (as a transition rule to be used in 2023 and 2024) for certifying that the critical minerals within an EV’s battery meet the statutory requirements:
- Step 1: Identify the procurement chain(s) for each critical mineral based on location. Relevant to section 30D, the white paper introduces the following two broad categories of procurement chains:
- Extraction-Processing. A value chain beginning with the extraction and conversion of minerals or natural resources from the ground, waste, or residue, followed by the processing of these materials or substances into constituent materials — materials containing critical minerals used directly in battery component manufacturing.
- Recycling. A value chain in which recyclable materials containing critical minerals are transformed into specification-grade commodities that result in constituent materials.
- Step 2: Determine whether a critical mineral from each procurement chain is a “qualifying critical mineral.” For each procurement chain, a critical mineral that came from that chain is treated as qualifying if 50% or more of the value added to that mineral occurred in the permitted region. For example, lithium that came from a particular extraction-processing value chain is qualifying if either:
- The extraction steps that occurred in the United States (or an FTA partner country) contributed to 50% or more of the incremental value added by all of the extraction steps; or
- The processing steps that occurred in the United States (or an FTA partner country) contributed to 50% or more of the incremental value added by all of the processing steps.
- Step 3: Calculate the percentage of the value of qualifying critical minerals by dividing the aggregate value of all qualifying critical minerals contained in a battery by the aggregate value of all critical minerals in the same battery.
Free Trade Agreement Guidance
The FTA requirement has drawn substantial criticism from some European and Asian trading partners with significant EV manufacturing operations as being an unreasonable restriction on trade. U.S. domestic manufacturers have also expressed general concerns regarding the availability of adequate supply of critical minerals from FTA partners. Yielding to those concerns, the white paper notes that the term “free trade agreement” is not defined in the Inflation Reduction Act. Accordingly, Treasury and the IRS expect to seek comment in the proposed guidance on what criteria should be used to identify free trade agreements for purposes of the critical mineral requirement. Proposed criteria may include whether an agreement reduces or eliminates trade barriers on a preferential basis, commits the parties to refrain from imposing new trade barriers, establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions, including for the critical minerals contained in electric vehicle batteries. Application of these or other criteria may broaden the universe of countries available to source critical minerals beyond the list of 20 countries with which the United States currently has a comprehensive trade agreement.
Battery Components Requirement
The section 30D credit requires that 50 percent of the value of an EV’s battery components must be manufactured or assembled in North America if the EV is placed in service in 2023 (after the publication of proposed guidance expected in March 2023). This amount increases to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% after 2028.
It is anticipated that proposed guidance will provide the following four steps for certifying that an EV meets the battery component requirement:
- Step 1: Determine whether substantially all of the manufacturing or assembly activities for each battery component occurred in North America (without regard to the manufacturing or assembly activities of the subcomponents).
- Step 2: Determine the incremental value for each battery component, and determine whether the incremental value is attributable to North America based on the determination made in step 1.
- Step 3: Determine the total value of the battery components by totaling the incremental values of each battery component determined in step 2. Alternatively, the total value may be calculated by summing the value of battery modules.
- Step 4: Calculate the percentage of the value of the battery components manufactured or assembled in North America by dividing (1) the sum of the incremental values of all battery components attributable to North America determined in step 2 by (2) the total value determined in step 3.
The white paper also provides preliminary sketches of the following terms, although Treasury indicates it will supply more through proposed definitions of these terms in later guidance:
- Battery cell. “Battery cell means a combination of battery components (not including battery cells) capable of electrochemically storing energy from which the electric motor of a clean vehicle draws electricity.”
- Battery component. “Battery component means a component of a battery that is manufactured or assembled from one or more components or constituent materials that are combined through industrial, chemical, and physical assembly steps. Battery components may include, but are not limited to, a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module.”
- Incremental value. “Incremental value, with respect to a battery component, means the value determined by subtracting from the value of that battery component the value of the manufactured or assembled battery components, if any, that are contained in that battery component.”
Treasury clarifies that the constituent materials of battery components would not themselves constitute battery components (specifically, because constituent materials are produced by processing or recycling critical minerals, rather than through manufacturing or assembly). Importantly, because the incremental value of a battery component is determined by reducing the value of such battery component only by the value of other battery components contained in such battery component, this means that “the incremental value of battery components would include [i.e., would not be reduced by] the value of constituent materials contained therein.”
In the percentages calculation, this approach will have the effect of assigning significant weight to the location where constituent materials are first manufactured or assembled into a battery component—thus incentivizing industry participants to locate those activities in North America. And there will be the greatest “bang-for-the-buck” for locating in North America the manufacturing or assembly of the battery components with the greatest combined value of constituent materials plus manufacturing value-add.
Notice 2023-1, “Certain Definitions of Terms in Section 30D Clean Vehicle Credit”
For the section 30D clean vehicle credit, the final assembly of a vehicle must occur within North America, and a manufacturer’s suggested retail price cannot exceed the applicable limitation, which depends on vehicle classifications. The applicable limitation for a van, a sport utility vehicle, and a pickup truck is $80,000 of MSRP, and the applicable limitation for any other vehicle is $55,000 of MSRP. The notice provides the following new definitions to clarify key terms that appear throughout section 30D.
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 notice provides the following additional guidance, explaining that a taxpayer may rely on either of the indicators below to determine a vehicle’s location of final assembly:
- the vehicle’s plant of manufacture as reported in the vehicle identification number pursuant to 49 CFR 565; or
- the final assembly point reported on the label affixed to the vehicle as described in 49 CFR 583.5(a)(3).
The notice clarifies that “North America” means the territory of the United States, Canada, and Mexico as defined in 19 C.F.R. part 182, Appendix A, § 1(1).
Manufacturer’s Suggested Retail Price (MSRP)
The notice clarifies that, under to the IRA’s new MSRP cap, the term “manufacturer’s suggested retail price” is the sum of: (A) the retail price of the automobile suggested by the manufacturer as described in 15 U.S.C. 1232(f)(1); and (B) the retail delivered price suggested by the manufacturer for each accessory or item of optional equipment, physically attached to such automobile at the time of its delivery to the dealer, which is not included within the price of such automobile as stated pursuant to 15 U.S.C. 1232(f)(1), as described in 15 U.S.C. 1232(f)(2). The notice explains that this information is reported on the label that is affixed to the windshield or side window of the vehicle, as described in 15 U.S.C. 1232.
Following section 30D(f)(11)(c), the notice states that a vehicle’s “vehicle classification” must be consistent with the rules and definitions provided in 40 CFR 600.002 for vans, sport utility vehicles, and pickup trucks.
Placed in Service
The notice clarifies that a new clean vehicle is considered to be “placed in service” on the date the taxpayer takes possession of the vehicle.