March 2023

By Karen A. Tramontano

The Inflation Reduction Act of 2022 (IRA), passed by the U.S. Congress and signed into law by President Biden on August 16, 2022, includes numerous provisions designed by Democrats and defined as must pass priorities to address issues Republicans had long ignored, including gaps in health care, much needed incentives to address climate change, corporate taxation policies, and the high cost of prescription drugs.

The climate change provisions are far reaching, make good on President Biden's promise to address the devastating effects of climate change, provides tax and other incentives to move consumers and the private sector to adopt effective climate change strategies, and arguably move the U.S. ahead of the European Union's climate change agenda.

Other provisions, including the minimum tax on corporations achieve the G-7 agreement of a minimum of 15% to impede corporate entities from chasing low tax jurisdiction— a practice that encourages a race to the bottom rather than corporate investment.

It is no secret that the tax credit given to individuals and companies that purchase electric vehicles has drawn the European Union's ire. While the application and regulatory framework of these provisions continues to be the subject of negotiations between the European Union and the United States, it is important to clarify what, if any, content requirement is required before the purchaser can receive a tax credit. 

There is more than one tax credit provision. In fact, there are several. Two apply in a commercial context and are less restrictive. One applies to U.S. consumers, and it has condition. That there are several tax credit provisions seems to have gotten lost in the noise.

U.S. businesses purchasing electric vehicles (EVs) are eligible for a credit of up to $7,500 for the purchase of light-duty vehicles (up to 14,000 pounds) and up to $40,000 for heavier vehicles. Unlike the tax credits for individual consumers, these credits are not subject to requirements that final assembly of the vehicles take place in North America and that certain percentages of battery components be sourced from the U.S. or countries with which the U.S. has a free trade agreement.

The less restrictive commercial credit also applies to leased vehicles—with the tax credit going to the leasing company. So, under the current regulations, U.S. businesses, including leasing companies that purchase light or heavy vehicles produced in the EU or elsewhere would be eligible for the commercial tax credits.

An individual consumer may be eligible for a tax credit of up to $7,500 if two conditions apply. First, the final assembly of the vehicle must be done in North America. Second, no vehicle will qualify if its battery components or its critical minerals come from a foreign country. For a plug-in vehicle, the credit is in two equal parts. The first is based on the value of the battery production criteria—not the battery capacity. One half of the tax credit is based on the battery production's critical minerals recycled in the United States or extracted or processed in a country that is a party of the U.S. free trade agreement. The remaining half requires a minimum percentage of the battery components to be made in North America.

These requirements, while upsetting to U.S. partners, including the European Union and Korea are consistent with the U.S. effort to reduce its reliance on production of batteries and critical minerals sourced from China. Moreover, since the IRA tax provision in effect requires U.S. taxpayers to subsidize the purchase of electric vehicles, do not U.S. taxpayers have a right to require those vehicles and their components to be made in the U.S.?