The US Treasury Department has issued guidance for the electric vehicle (EV) tax credits under the famous Inflation Reduction Act (IRA). Though the final draft doesn’t bring in surprise requirements, the declaration has been awaited as it outlines how the eligibility for the second half, applying to battery component sourcing and critical minerals, is calculated.

What we know so far is ratified by the draft, also called the Notice of Proposed Rulemaking (NPR), which has been delayed since December. The maximum incentive amount ($7 500) is now divided into halves. They’re not linked. If it complies with one set of rules, a car can receive a provision for half of the credit.

North American assembly

The first part stipulates that the car’s production must occur in North America: the US, Puerto Rico, Canada, and Mexico. This applies to passenger cars, as the EU and the US have agreed earlier on an exception for zero-emission light commercial vehicles.

Until now, only this part of the provision counted when the bill passed in August last year. So, cars built in North America with foreign-sourced battery packs were also valid for the maximum amount. But that’s about to change.

Growing ratios

A decision on the embedded second leg of $3 750 of the incentive was still pending and delayed as it was supposed to take effect in December last year. This specifies requirements for battery components and critical mineral sourcing.

Treasury has now detailed that after April 17, 2023, the date the proposal takes effect, the component manufacture rate from the US, or a US free trade country, must be 50%.

Each year, this portion rises by one-tenth, meaning that by 2029, no parts can be made in a foreign entity of concern (FEOC) to comply with this part of the subsidy.

The portion for critical minerals follows the same curve of gradual increase but starts at 40%, while the lowest threshold remains at 80% in 2027. It means that fewer cars can apply for full credit as of today.

Listing eligible countries

The prerequisite for the origin of battery production and materials were already disclosed before finalizing the proposal. What counts is that the ruling now details which countries are categorized under the free trade agreement.

These include Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. In addition, a special trade deal unveiled earlier this week finally adds one more Asian country to that list: Japan.

The EU, the UK, and China are excluded. However, EU commission president Ursula von der Leyen is in talks with Joe Biden to negotiate how both economic powerhouses can cooperate on this matter and avoid a protectionist ruling eroding both sides’ competitiveness. The discussions concentrate on the part of critical materials.

Proposal, not yet a bill

On the 18^th of April, Treasury will publish a list of all clean vehicles eligible for the EV credits and their respective subsidies. The proposal isn’t a bill yet and remains open to amendments until June 16, the date set for approval. However, the proposal does take immediate effect in April. If requirements change, cars registering after the deadline in June will need to comply with the adapted ruling.