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Treasury Signals Opening for Foreign Carmakers on EV Subsidy

Bloomberg logoBloomberg 12/29/2022 Gabrielle Coppola and Christopher Condon
Joe Manchin on Aug. 16, 2022. © Bloomberg Joe Manchin on Aug. 16, 2022.

(Bloomberg) -- The US Treasury Department signaled some imported cars will qualify for electric-vehicle tax credits in the Inflation Reduction Act, a move that could assuage Asian and European allies’ concerns about the sweeping climate legislation.

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The Treasury sketched out its interpretation of content requirements for electric-vehicle tax credits Thursday, while delaying final rules until March so officials have more time to address the complexities of the law.

In a list of frequently asked questions, Treasury officials indicated that imported EVs can qualify for a consumer tax credit of up to $7,500 through a commercial-vehicle clause in the law by leasing them. That ruling will help foreign carmakers like Hyundai Motor Co., which has complained that their electric models were excluded from the subsidy because they don’t currently manufacture them in North America.

An electric car stencil symbol sits on a parking space at the electric vehicle charging site in Hanover, Germany. © Photographer: Alex Kraus/Bloomberg An electric car stencil symbol sits on a parking space at the electric vehicle charging site in Hanover, Germany.

Making leased cars eligible as commercial vehicles triggered an immediate and angry response from West Virginia Senator Joe Manchin.

Interpretation ‘Inconsistent’

In a statement Thursday, Manchin criticized the Treasury’s interpretation and urged officials to pause implementation of both the commercial and consumer electric-vehicle tax credits until the department issued “the appropriate guidance.”

Manchin said the Treasury’s interpretation “bends to the desires of the companies looking for loopholes and is clearly inconsistent with the intent of the law.”

A Treasury official said the department’s ruling didn’t seek to accommodate any parties with an interest in the law.

“Whether a taxpayer can claim the qualified commercial clean-vehicle credit in its business depends on who is the owner of the vehicle for federal income-tax purposes,” the department said in the FAQ issued Thursday. “Based on longstanding tax principles, the determination whether a transaction constitutes a sale or a lease of a vehicle for tax purposes is a question of fact.”  

New Legislation

Manchin, who chairs the Senate Committee on Energy and Natural Resources, said he will introduce legislation when Congress returns next year that “further clarifies the original intent of the law and prevents this dangerous interpretation from Treasury from moving forward.”

The West Virginia senator, who provided Democrats a pivotal vote on the legislation back in August, fought to include new limits on who could claim the tax credits, which he previously dismissed as “ludicrous.” Manchin argued that without tough rules mandating manufacturing in the US and rules on content, the act would subsidize production in China and by other US adversaries.

The legislation, which provided a record $370 billion in spending to combat climate change, passed on a party-line vote. 

For vehicles to qualify for the full $7,500 consumer tax credit, Manchin’s content rules also require that 40% of raw materials in an EV battery be extracted and processed in countries that have a free-trade agreement with the US, and 50% of battery components must be made in North America, with the percentages increasing over time.

Hyundai and the Korean government aggressively lobbied the Biden administration to take a broader interpretation of the law’s commerical-vehicle clause, which allows vehicles to qualify for the $7,500 tax credit without meeting the strict content requirements on batteries and critical minerals that apply to vehicles sold at retail.

A Hyundai spokesman said the company is still reviewing the latest information released by the Treasury.

‘No Surprise’

Manchin has little grounds to complain about the Treasury’s reading of the law with regard to leased cars, said James Lucier, managing director of research firm Capital Alpha Partners LLC-.

“This is what happens when legislation does not go through regular order and you don’t have a committee looking at all the provisions,” he said.

The bill was largely crafted behind closed doors between Manchin and Senate Majority Leader Chuck Schumer.  

Read more: Manchin-Schumer Shock Deal Began in Basement, Unfolded in Secret

More time is needed to unpack Treasury’s read of the commercial-vehicle clause, said Joe Britton, head of the Zero Emission Transportation Association, a Washington trade group representing EV manufacturers. 

“Some people were very excited about the potential cracked-open door,” he said by phone. “If they’re trying to do it just to sell to average retail consumers, that’s where it gets a little more difficult to defend.”

Treasury officials also outlined the process for carmakers to comply with the act’s content requirements on critical minerals and battery components. These may limit automakers’ eligibility for the full tax credit, but only once they go into effect in March.

Until then, existing rules that grant tax credits based on the size of an EV battery will apply. Cars will still be required to be assembled in North America to qualify, and be subject to price and income thresholds as prescribed by the act, a Treasury official said. 

Read more: Yellen Tempers Expectations for Major EV Tax Credit Tweaks

That means automakers like General Motors Co. and Tesla Inc., which had reached a 200,000-unit cap on eligible EV sales under previous IRS rules, could enjoy an extension of the full credit on vehicles assembled in North America come Jan. 1 — until final rules are proposed in March.

GM and Tesla didn’t immediately respond to requests for comment. 

Immediate Benefit

Also watching closely are governments whose EV industries appear locked out of some subsidies because they only apply to producers in North America.  

The European Commission said Thursday’s move means the bloc’s companies “will be able to immediately benefit.” Further discussions are ongoing in the EU-US Inflation Reduction Act Task Force, it said in a statement.

European Union leaders — including French President Emmanuel Macron during a December visit to the White House — have complained that the legislation will damage EU industry already suffering from high energy costs due partly to the war in Ukraine. 

Other critics include South Korea — home to the Hyundai and Kia Corp. car brands — as well as Argentina, the world’s fastest-growing producer of lithium, a critical battery material.

Mineral Suppliers

Treasury officials hinted that more countries that produce the minerals critical to battery production may be added as eligible suppliers under the law before the final rules are published in March.

“Treasury and the IRS expect to propose that the secretary may identify additional free-trade agreements for purposes of the critical-minerals requirement going forward,” officials said in the document. They “will evaluate any newly negotiated agreements for proposed inclusion during the pendency of the rulemaking process or inclusion after finalization of the rulemaking.” 

To give car buyers more clarity, the administration published a list of vehicles automakers have indicated will be eligible for the tax credit on Jan. 1. The list will grow as carmakers submit eligibility data, an official said. It’s also created a website where consumers and dealers can enter a vehicle identification number to determine eligibility.

--With assistance from William Wilkes and Kellie Lunney.

(Updates with European Commission two paragraphs under Immediate Benefit subheading.)

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