Biden Admin Issues Sweeping EV Tax Credit Rules, Leaving Door Open For Foreign Companies

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The U.S. Internal Revenue Service (IRS) announced new guidance on how it will interpret President Joe Biden’s signature Inflation Reduction Act (IRA), leaving the door open for European automakers to cash in on the bill’s subsidies.

The new rules are expected to immediately limit the number of electric vehicles that qualify for tax credits when they go into effect on April 18, thanks to stricter requirements for both sourcing battery components and manufacturing in the U.S. or nations that have a “free trade agreement” with the U.S., Axios reported. The Biden administration has faced significant pressure from foreign allies to ensure that their countries are eligible for tax credits, according to The Wall Street Journal.

The proposal names 21 foreign nations that the IRS considers to have free trade agreements in effect, including South Korea and Japan, who had each expressed concerns that the IRA was a protectionist policy that violated existing trade deals. The U.S. recently struck a deal with Japan regarding minerals sourcing, and work is ongoing for a similar deal to be reached with the European Union, which remains ineligible under the current guidance.

“We’re quite optimistic that we can reach an agreement of the same sort of substantial scope as the Japanese,” Margrethe Vestager, E.U. executive vice president said Thursday, the WSJ reported.

The administration considers the use of these agreements as key to boosting the sale and production of electric vehicles, according to Politico.

The tax break is broken into two components, a $3,750 critical mineral component, which requires 40% of the critical minerals in a vehicle’s battery be mined and processed in the U.S. or a country with which the U.S. has a free trade agreement, and a $3,750 manufacturing requirement that at least 50% of a battery must be manufactured or assembled in North America, according to the Treasury Department. These metrics scale to 80% by 2027 and 100% by 2029 respectively.

The announcement prompted a sharp rebuke from Democratic Sen. Joe Manchin, who negotiated with high-ranking Democrats to reduce the overall cost of the bill and support a variety of U.S. energy sources, saying the IRS guidance ‘ignores the intent” of the IRA, in a press release Friday.

“It is horrific that the Administration continues to ignore the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains,” said Manchin. “American tax dollars should not be used to support manufacturing jobs overseas. It is a pathetic excuse to spend more taxpayer dollars as quickly as possible and further cedes control to the Chinese Communist Party in the process.”

Starting in 2024, electric vehicles will no longer qualify for tax credits if any battery components are manufactured by a “foreign entity of concern,” which will be defined in subsequent proposal, according to the Treasury Department. While these entities have not been named, this rule is expected to make it significantly more difficult for electric vehicle makers to qualify for tax credits, especially considering the many joint ventures between U.S. and Chinese companies in the sector, according to the WSJ.

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