Today, the Department of the Treasury and IRS made available for public inspection proposed regulations on the new clean vehicle credit under the Inflation Reduction Act of 2022, as codified in section 30D of the Internal Revenue Code. These proposed regulations will be published in the Federal Register on April 17, 2023, and the due date for comments will be 60 days after the publication (or Friday, June 16, 2023).
The proposed regulations provide for a credit of $3,750 for “new clean vehicles” placed in service after April 17, 2023 whose batteries satisfy either of certain requirements regarding their critical minerals or their battery components (for a total of $7,500 if both sets of requirements are met). The proposed regulations interpret these requirements in a manner consistent with the approach laid out in the December 2022 white paper and Notice 2023-1, which we described in our prior blog post. In addition, the proposed regulations provide other rules relevant to the application of the section 30D credit (including regarding the North American final assembly requirement and MSRP limitations).
Notably, the proposed regulations abstain from interpreting the phrase “foreign entity of concern” in section 30D(d)(7). As we noted in our prior blog post, Treasury’s interpretation of this phrase will define which vehicles are potentially eligible for the section 30D credit, and which will be “excluded” therefrom. Today’s proposed regulations provide that section 30D(d)(7) and the definition of “foreign entity of concern” will be addressed in future guidance. The fact that Treasury punted on interpreting “foreign entity of concern” in today’s proposed regulations, despite last week having interpreted the same term in a nearly contemporarily-enacted statute, suggests that Treasury is wrestling with the interpretive questions and policy pressures noted in our blog post, and how it will ultimately interpret the phrase is still in play.
Battery Sourcing Requirements
To determine if a vehicle satisfies the critical minerals and battery components requirements of section 30D, one must determine (1) if the percentage of the value of the critical minerals in a vehicle’s battery extracted or processed in the United States or a country with which the United States has a free trade agreement in effect (an FTA partner country) or recycled in North America (the qualifying critical mineral content) meets or exceeds the applicable critical minerals percentage and (2) if the percentage of the value of the vehicle’s battery components manufactured or assembled in North America (the qualifying battery components content) meets or exceeds the applicable battery components percentage. The applicable critical minerals percentage is 40 percent in 2023 (but after April 17, 2023) and gradually increases to 80 percent for 2027 and later. The applicable battery components percentage is 50 percent in 2023 (but after April 17, 2023) and gradually increases to 100 percent for 2029 and later.
To determine the value of critical minerals and battery components, the proposed regulations provide 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 section 482. An EV manufacturer must select a date to determine the value of critical minerals, and this date must be after the final processing or recycling step. Similarly, the incremental value of battery components must be determined on a date after the last manufacturing or assembly step. For each of the critical minerals and 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.
Calculation of Qualifying Critical Mineral Content
Consistent with the December 2022 white paper, the proposed regulations provide a three-step method to calculate the qualifying critical mineral content.
Step 1: Determine procurement chains
A procurement chain is “a common sequence of extraction, processing, or recycling activities that occur in a common set of locations with respect to an applicable critical mineral, concluding in the production of constituent materials.” For instance, if a critical mineral is extracted, processed, or recycled in two different sets of locations (e.g., the initial step in Country A and the final step in Country B versus the initial step in Country A and the final step in Country C), the critical mineral has two procurement chains.
Step 2: Identify qualifying critical minerals
For each procurement chain, determine whether critical minerals procured from the chain have been either extracted or processed in the United States or an FTA partner country or recycled in North America. A critical mineral that came from that chain is treated as qualifying if 50% or more of the value added to that mineral by extraction or processing occurred in a permitted region. Similarly, a critical mineral is treated as recycled in North America if 50% or more of the value added to that mineral occurred in North America. The preamble to the proposed regulations provide that after 2024, Treasury and the IRS anticipate making this 50% value-added test more stringent with more detailed tracking of supply chains.
Generally, extraction involves physical processes (such as extracting or harvesting minerals or natural resources from minerals and wells or waste or residue of prior extraction). Extraction concludes “when activities are performed to convert raw mined or harvested products or raw well effluent to substances that can be readily transported or stored for direct use in critical mineral processing.”
Processing means the non-physical processes, such as the chemical or thermal processes, involved in the refining of minerals. Processing includes “treating, baking, and coating processes used to convert such substances and materials into constituent materials.”
Step 3: Calculate qualifying critical mineral content
Qualifying critical mineral content with respect to an EV battery is calculated by dividing the total value of all qualifying critical minerals by the total value of all critical minerals.
Free Trade Agreement Requirement
For this purpose, Treasury uses a broad interpretation of the term “free trade agreement.” This broad interpretation is to assuage criticism from trading partners with EV battery supply chain industries and concerns regarding the availability of adequate supply of minerals from FTA partner countries.
The proposed regulations list the following FTA partner countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. In addition, Treasury will identify additional countries in the future based on the following factors: 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.
Calculation of Qualifying Battery Components Content
The proposed regulations provide a four-step method to calculate the qualifying battery components content.
Step 1: Identify components that are manufactured or assembled in North America
A manufacturer must determine whether substantially all of the manufacturing or assembly for each battery component occurred in North America (without regard to the location of manufacturing or assembly of any subcomponents).
Step 2: Determine incremental value of each battery component and North American battery component
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. The incremental value that is attributable to North America needs to be determined based on the determination made in step 1.
Step 3: Determine total incremental value of battery components
The total incremental value of battery components is the sum of the incremental values of each battery component determined in step 2. Alternatively, the total incremental value may be calculated by summing the value of each battery module in a battery.
Step 4: Calculate qualifying battery component content
The qualifying battery component content is calculated by dividing (1) the sum of the total incremental values of North American battery components determined in step 2 by (2) the total incremental value of battery components determined in step 3.
Battery Components and Constituent Materials
Where Treasury drew the line between constituent materials and battery components is important. As discussed above, to qualify for the battery components part of the credit, an applicable percentage of battery components (e.g., cathode electrodes, anode electrode, battery cells, and battery modules) must be manufactured or assembled in North America. But the critical minerals component of the credit considers whether extraction or processing occurred in the United States or any FTA partner countries for purposes of its percentage calculation. So, for instance, the processing of critical minerals into constituent materials (e.g., cathode active materials, anode active materials, and foils) in Korea and Japan will count toward the critical minerals percentage requirements, but the manufacture or assembly of those constituent materials into battery components in such countries will not count towards the battery components percentage requirements.
Battery component means “a component that forms part of a battery and which 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.”
Constituent materials means “materials that contain applicable critical minerals and are employed directly in the manufacturing of battery components. Constituent materials may include, but are not limited to, powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives, as required for a battery cell.”
Other Rules and Limitations
Section 30D provides certain additional limitations for when the credit is available to taxpayers, and the proposed regulations provide additional details on these requirements.
Final Assembly in North America
A vehicle is a “new clean vehicle” only if the final assembly occurs within North America. The proposed regulations provide further guidance, explaining that a taxpayer may rely on either of the following to determine a vehicle’s location of final assembly:
- the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) 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 proposed regulations provide that North America means the territory of the United States, Canada, and Mexico as defined in 19 CFR part 182, Appendix A, § 1(1).
MSRP Limitation and Vehicle Classification
No credit is allowed for a vehicle with a manufacturer’s suggested retail price in excess of certain limitations (an $80,000 limit for vans, SUVs, and pickup trucks and a $55,000 limit for other vehicles). Consistent with the latest guidance, the proposed regulations provide that vehicles are classified using the EPA’s fuel economy labeling regime. This regime is the classification displayed on the vehicle label and on the consumer-facing website with easy access by consumers.
Under the proposed regulations, the MSRP is the sum of: (1) the retail price of the automobile suggested by the manufacturer; and (2) 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.