The IRS and Department of Energy (DOE) have proposed new rules regarding sourcing requirements for critical minerals and batteries under the electric vehicle tax credit. The guidance also addresses DOE funding requirements.
The IRS issued proposed regulations on the rules for determining whether the sourcing of applicable critical minerals and battery components compliant with restrictions on sourcing from foreign entities of concern (FEOC). Additionally, a revenue procedure (Rev. Proc. 2023-38) with rules for qualified manufacturers to comply with reporting and certification requirements was introduced. The IRS guidance generally relies on separate proposed rules from the DOE defining FEOC.
An FEOC is generally defined under the applicable statutes as companies with ties to countries seen as U.S. competitors or geopolitical foes: China, Russia, Iran, and North Korea, with China by far being the most relevant country for the definition due to different restrictions on U.S. business activity with the other covered countries and due to its outsized role in the supply of battery materials and components.
Under the proposed rule, foreign entities are defined as:
- At least 25% controlled by a covered nation, either directly or through intermediaries, with equity, board seats, or voting rights as metrics used to determine control.
OR
- A provider of battery components, including critical minerals, who has entered into a sourcing agreement with a foreign entity, as defined above.
There are extensive rules for determining the percentage of control and whether a company is considered to have an applicable sourcing agreement and the determinations can be complex.
The proposed rules also have notable exceptions: facilities located in China or owned by Chinese companies believed to be independent of the Chinese government, could still be partners for companies from the U.S. and other countries who want their vehicles to qualify. Leased vehicles also count as commercial vehicles not covered by the proposed regulation.
The IRS and DOE also gave some time for auto companies to transition their supply chains. Vehicles with non-compliant batteries built before Jan. 1, 2024, will qualify for the EV tax credit, while the critical mineral restriction won’t go into effect until Jan. 1, 2025.
The DOE’s comment period for the proposed rule is open through Jan. 18.
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