Treasury: IRA Vehicle Tax Credit - Foreign Entity Rules

Treasury and Internal Revenue Service (IRS) released proposed guidance on the clean vehicle provisions of the Inflation Reduction Act (IRA). Today’s Notice of Proposed Rulemaking (NRPM) provides clarity and certainty around the IRA’s foreign entity of concern (FEOC) requirements. 

Beginning in 2024, an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a FEOC, and, beginning in 2025, an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a FEOC.

In conjunction with today’s Treasury NPRM, the Department of Energy has released proposed guidance defining what entities are a FEOC.

The NPRM provides proposed rules to determine whether applicable critical minerals (and their associated constituent materials) and battery components are manufactured or assembled by a FEOC for battery components, and extracted, processed, or recycled by a FEOC for critical minerals. The proposed rules would require manufacturers to conduct due diligence that complies with industry standards of tracing for battery materials.

Under the proposal, FEOC-compliance for battery components would be determined at the time of manufacture or assembly, and FEOC-compliance for critical minerals would be determined by reviewing all phases of applicable critical mineral extraction, processing, and recycling. For example, a mineral extracted by an entity that is not a FEOC but processed by an entity that is a FEOC would not be compliant. Compliant battery components would have to be tracked to FEOC-compliant battery cells, and cells could not be manufactured or assembled by a FEOC.

Critical minerals generally also must be traced. However, given that there is commingling in the critical mineral supply chains and suppliers may not be able to physically track certain specific masses of minerals to specific battery cells or batteries, the NPRM asks for comments on a temporary transition rule, under which critical minerals and associated constituent materials may be allocated to a particular set of battery cells. The battery cells would then have to be physically tracked to batteries and new clean vehicles using a serial number or other identification system.

The NPRM also asks for comment on a proposed additional transition rule as the automotive industry develops the ability to trace certain low-value materials with precision. The NPRM proposes a temporary transition rule through 2026 that would give the industry time to develop tracing standards for these low-value materials. The guidance asks for comment on the need for and design of such a rule, what materials should be included under this approach, and whether alternative approaches to such a transition rule would be more appropriate.

Treasury Department and the IRS request comment on whether a transition rule that adopts an alternative to the approach of listing materials would better achieve the Treasury Department’s and IRS’s stated goals and the challenges posed by low-value materials that are not currently feasible to trace. The Treasury Department and the IRS specifically request comment describing alternative approaches to providing a transition rule that accounts for low-value materials that cannot be traced under current industry standards and that is responsive to rapidly changing industry practice.

Ever quick to comment, Rep. Mike Gallagher (R-Wis) released a statement decrying the proposed rules: "Instead of securing critical supply chains and protecting vital American industries, Treasury’s rules will sell out American workers and increase our dependence on Communist China," 

[FR 2023-26513]. [Treasury Announcement]