Treasury's Proposed Regulations on New Clean Vehicle Credit Detail Critical Minerals and Battery Components Requirements
On March 31, 2023, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued proposed regulations regarding the section 30D consumer tax credit available for the purchase of a new electric or fuel cell vehicle (the Proposed Regulations),1 following a request for comments the IRS issued in Notice 2022-46 last year. Treasury and the IRS received hundreds of comments on section 30D, reflecting that it is one of the most significant provisions of the Inflation Reduction Act (IRA) in terms of dollar amounts, consumer awareness, and public discourse.2
Section 13401 of the IRA3 overhauled the consumer electric vehicle credit of section 30D, which had been part of the Internal Revenue Code since 2008.4 Some of the changes made were favorable to consumers, such as moving the per-manufacturer limitation that had been part of the previous statute. Other aspects of new section 30D place additional requirements on vehicles to qualify. These requirements include: (1) a requirement that vehicles meet new critical minerals and battery components requirements;5 (2) a requirement that the final assembly of the vehicle occur in North America; (3) a requirement that for vehicles placed in service in 2025, any applicable critical minerals in the battery not be extracted, processed, or recycled by a "foreign entity of concern" and that for any vehicle placed in service in 2024 or later, the components of the battery not be manufactured or assembled by a "foreign entity of concern"; (4) a denial of the credit to taxpayers whose modified gross income exceeds $150,000 ($300,000 for joint filers);6 and (5) a denial of the credit if the manufacturer's suggested retail price (MSRP) of the vehicle exceeds certain levels which depend on the type of vehicle.7
The Proposed Regulations provide guidance on many but not all the requirements above. Prop. Treas. Reg. § 1.30D-1 provides basic guidance on how the credit is claimed. It is fair to say that practitioners may not find much surprising in that regulation, as it hews closely to the statute itself. Prop. Treas. Reg. § 1.30D-4 likewise follows the statute closely on providing guidance on the gross income limitation and the denial of double benefits with respect to the section 30D credit.
Prop. Treas. Reg. § 1.30D-2 technically provides "definitions" relevant to section 30D, some of which are important. For example, Prop. Treas. Reg. § 1.30D-2(g) provides guidance on vehicle classification, which is relevant to determining the MSRP limitation of section 30D(f)(11). Generally, the definitions in regulations promulgated by the Environmental Protection Agency (EPA) (40 C.F.R. § 600.315-08(a)(3)) are used for this purpose. The Proposed Regulations also provide guidance on the final assembly requirement of section 30D(d)(1)(G), stating that taxpayers may rely on information in the vehicle identification number (VIN) or on the label affixed to the vehicle.
Critical Minerals and Battery Components Requirements
Prop. Treas. Reg. § 1.30D-3 provides guidance on the critical minerals and battery components requirements of section 30D(e)(1) and (2), respectively. Under section 30D(e)(1)(A), an applicable percentage of the critical minerals contained in the vehicle's battery must be either (1) extracted or processed in the U.S. or any country with which the U.S. has a free trade agreement (FTA) in effect or (2) recycled in North America. The applicable percent begins at 40 percent for vehicles placed in service "after the date on which proposed guidance … is issued by the Secretary and before January 1, 2024," and increases starting in 2024.8 If the critical minerals requirement is not met, the maximum amount of the section 30D credit is only $3,750 (as opposed to $7,500, which is dependent on meeting the battery components requirement).9
With respect to the critical minerals requirement, the Proposed Regulations describe its three-step process. Manufacturers must determine procurement chains for each applicable critical mineral used in an electric vehicle battery (such as lithium and manganese). Qualifying critical minerals are identified based on whether 50 percent or more of the value added to the applicable critical mineral procured from the chain has been (1) extracted or processed in the U.S. or in any country with which the U.S. has an FTA in effect, or (2) recycled in North America. The qualifying critical mineral content is then calculated by dividing the total value of qualifying critical minerals by the total value of critical minerals and must be equal or greater than the applicable percentage set forth in the statute. Treasury specifically seeks comments on adopting a test more "stringent" than the proposed 50 percent value added test after 2025 and developing criteria for and a list of countries with which the U.S. has "reliable and trusted economic relationships."
Under the Proposed Regulations, an FTA (which is not defined in section 30D or elsewhere in the Code) is defined broadly. As the preamble states:
The proposed definition takes into account the term's meaning, use and context in the statute. The IRA's amendments to section 30D expand the incentives for taxpayers to purchase new clean vehicles and for vehicle manufacturers to increase their reliance on supply chains in the United States and in countries with which the United States has reliable and trusted economic relationships. The Treasury Department and the IRS recognize that more secure and resilient supply chains are essential for our national security, our economic security, and our technological leadership. The Treasury Department and the IRS propose to identify the countries with which the United States has free trade agreements in effect for purposes of section 30D consistent with the statute's purposes of promoting reliance on such supply.10
Thus, Prop. Treas. Reg. 30D-3(c)(7)(i) sets forth criteria to be considered in identifying future agreements that may qualify and are to be evaluated both with respect to critical minerals as well as the "overall commercial and economic relationship between [the foreign country] and the United States." The criteria are the reduction or elimination of trade barriers on a preferential basis, the commitment of the parties to refrain from imposing new trade barriers, the establishment of high standard disciplines in key areas of affecting trade (specifically referencing core labor and environmental protections), and the reduction or elimination of restrictions on exports along with the commitment from the parties to refrain from imposing such restrictions.11
Under the Proposed Regulations, the U.S. is currently treated as having FTAs with 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. The list is significant for its inclusion of Japan: Japan signed a "Critical Minerals Agreement" with the U.S. on March 28, which generally is consistent with the criteria set forth in the Proposed Regulations. The agreement does not rise to the level of what is significantly thought of as an FTA" generally, which is approved by Congress, incorporated into statute, and signed by the president and is not targeted to a specific set of commodities.
On that note, President Biden and European Commission President Ursula von der Leyen announced last month that the U.S. and the EU were seeking to "immediately begin negations on a targeted critical minerals agreement." If such an agreement is reached, it is likely that Treasury and the IRS will seek to incorporate it into the definition of an FTA," given the criteria set forth in the regulations.
The Proposed Regulations provide for a somewhat similar process for the battery components requirement. Under section 30D(e)(2), an applicable percentage by value of components of the vehicle's battery must be manufactured or assembled in North America. The applicable percentage begins at 50 percent for vehicles placed in service "after the date on which proposed guidance … is issued by the Secretary and before January 1, 2024," and increases starting in 2024.12 If the critical minerals requirement is not met, the maximum amount of the section 30D credit is only $3,750 (as opposed to $7,500, which is dependent on meeting the critical minerals requirement).13
The Proposed Regulations provide a four-step process for manufacturers to comply with the battery components requirement. Battery components that are manufactured or assembled in North America first must be identified. Manufacturers then determine the incremental value of the battery components including North American battery components, followed by the total increment values of the battery components. The qualifying battery component content is then calculated by dividing the total incremental value of North American battery components by the total incremental value of all battery components and must be greater than the applicable percentage.
Foreign Entity of Concern Rules Unaddressed, But Loom Large
Significantly, the Proposed Regulations reserve on the "foreign entity of concern" rule set forth by section 30D(d)(7), with the preamble stating that Treasury and the IRS "intend to issue guidance with respect to section 30D(d)(7) at a later date." This rule goes into effect starting with vehicles that are placed in service in 2024, so Treasury and the IRS have some time here. However, this is an area that saw significant stakeholder comments, and rightly so: the statute defining foreign entity of concern (42 U.S.C. § 18741(a)(5)) singles out entities that are "owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation" (and the term is defined elsewhere as Russia, North Korea, China, and Iran). It is not clear from the statutory text, which comes from the November 2021 Bipartisan Infrastructure Act,14 what these terms mean. For example, is a Chinese subsidiary of a company organized elsewhere intended to be covered? What about a 50/50 joint venture, organized in America, between an American and Chinese company, or an American subsidiary of a publicly traded Chinese company?
Significantly, Prop. Reg. § 1.30D-4 applies to clean vehicles placed in service after April 17, 2023, consistent with section 30D(e)(1) and (2).15 This is the date that Treasury and the IRS published the Proposed Regulations in the Federal Register. And the definitions, which include some relevant terms for the critical minerals and battery components requirements, are effective beginning with vehicles placed in service on or after January 1, 2023, for taxable years ending after April 17, 2023.16 This is a relatively unique (but not unheard of) feature of Proposed Regulations; generally, such regulations are not effective until published as final regulations, which is true of the other aspects of the Proposed Regulations.17
The preamble to the Proposed Regulations states that taxpayers may submit comments or requests for a public hearing by June 16, 2023.18 Given the significance of the rules, we expect a large volume of public comments, as was the case for the comments requested in Notice 2022-46. Miller & Chevalier is closely monitoring developments with respect to the section 30D credit.
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1Treasury and the IRS formally published the regulations in the Federal Register on April 17, 2023. See 73 Fed. Reg. 23370.
22022-43 I.R.B. 306.
3Pub. L. 117-169 (Aug. 16, 2022).
4See Energy Improvement and Extension Act of 2008, Pub. L. 110-343, § 205(a) (Oct. 23, 2008).
5Section 30D(e)(1) and (2).
1073 Fed. Reg. at 23376.
11Prop. Treas. Reg. § 1.30D-3(c)(7)(i).
14See Infrastructure Investment and Jobs Act, Pub. L. 117-58 (Nov. 15, 2021).
15Prop. Treas. Reg. § 1.30D-3(f).
16Prop. Treas. Reg. § 1.30D-2(i).
17Prop. Treas. Reg. §§ 1.30D-1(d), -4(e)
1873 Fed. Reg. at 23370.
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