The US Government officially released new federal electric vehicle tax credits guidance under the Inflation Reduction Act on December 1. As expected, the update further intensified the current stringent standards on foreign materials, particularly from China.
Fortunately, the White House provided automakers with a considerable exemption that will extend time for companies seeking to build a local battery production operation in the country, Teslarati reported.
Changes
The Inflation Reduction Act now states that any electric vehicle equipped with battery components sourced from a “foreign entity of concern” (FEOC) will lose access to the federal tax credits starting in 2024.
The move is part of the US Government’s efforts to accelerate the clean vehicle transition and cut its reliance on Chinese supply chains. However, the updated guidance alarmed the automotive industry as numerous EVs would lose their eligibility as many automakers rely on China-made batteries, minerals, or other materials.
Foreign entity of concern
According to the US Treasury and Energy departments’ new guidance, a “foreign entity of concern” is a company “controlled by, owned by, incorporated in, headquartered in, or performing the relevant activities in a covered nation.” For context, these nations include China, Iran, North Korea, and Russia.
If an entity of concern holds 25% or more of a company’s ownership or board seats, its produced minerals or parts would be ineligible for vehicle credits. It is possible that licensing agreements with FEOCs are free from any complications, as noted by InsideEVs.
Good news for automakers
The US Treasury apparently offered an exemption that will extend the time for companies seeking to establish domestic battery production to adhere to the stringent requirements of federal tax credits.
As mentioned, the FEOC guidance for completed batteries will take effect next year. However, it would not yet apply to trace critical minerals until 2025. As per the updated guidance, the exempted minerals account for below 2% of the battery minerals’ overall value.
The Alliance for Automotive Innovation called for the US Government to exclude trace materials for the subsequent two years, saying that it is “significant and well-advised” as the originally proposed standards will disqualify more models.
“We don’t know yet how the FEOC rules will impact which EVs qualify for some or all of the tax credit. Time will tell. But Treasury’s effort to make the rules workable means the list of eligible vehicles won’t completely disappear in 2024 (which was a real worry).”
John Bozella, Alliance for Automotive Innovation President and CEO
It is also worth noting that the updated guidance will allow customers to benefit immediately from the tax credits at the time of purchase, unlike the current version that only supports tax duty deductions.
All that said, losing tax credits will undoubtedly have a huge impact on electric vehicle sales next year, considering the recent reports of waning demand. Customers interested in buying EV models currently qualified for full tax credits must take delivery before the year ends to avoid losing the incentive.
