WASHINGTON — The Biden administration on Friday issued vital guidance for automakers on how strictly it will enforce a provision that blocks consumer tax credits for electric vehicles that contain battery materials from foreign adversaries such as China.
Broadly, the guidance gives automakers more certainty as they invest billions in domestic EV and battery manufacturing and rethink their supply chains, in part to ensure their vehicles qualify for tax credits. However, the tougher eligibility restrictions likely will slash the number of EVs that qualify as soon as next year.
Starting Jan. 1, EVs are ineligible for a tax credit of up to $7,500 if any of the battery components are made or assembled by a “foreign entity of concern,” which covers China, Iran, North Korea and Russia. In 2025, the exclusion applies to critical minerals that are extracted, processed or recycled by one of those entities.
As part of the proposed guidance released Friday, the U.S. Treasury Department said it was adopting the Energy Department’s definition of a foreign entity of concern that is being used to implement a $6 billion battery materials processing and manufacturing grant program in 2021’s infrastructure law. As with the tax credit, the grant program limits the involvement of foreign adversaries in the U.S. battery supply chain.
Under the Energy Department’s definition, also released Friday, a company is considered a foreign entity of concern if it meets at least one of three prongs, including if at least 25 percent of its voting interest, board seats or equity interests are held either directly or indirectly by a covered nation’s government, regardless of where the relevant activities occur.
Treasury’s guidance builds on that definition by giving automakers the information they need to examine their supply chains and trace key battery materials to determine which vehicles qualify when the tougher rules take effect next year.
A public comment period will be open for 30 days for the Energy Department’s proposed definition and 45 days for Treasury’s additional guidance once the documents are published in the Federal Register.
“The proposed guidance will provide clarity and certainty for U.S. automakers, battery manufacturers and producers of critical minerals,” said John Podesta, President Joe Biden’s senior adviser for clean energy innovation and implementation.
“It will encourage these industries to invest in diversified and resilient critical mineral and battery supply chains, and it will support good-paying jobs in the EV and battery industries, paving the way for an electric transportation future that’s built here in America,” he told reporters at a briefing Wednesday.
The foreign entity of concern guidance has been anxiously awaited by automakers looking to make sure their vehicles qualify as more eligibility restrictions set in.
The provision is tied to the Inflation Reduction Act’s Section 30D tax credit, which is available only to North American-assembled EVs that also meet eligibility restrictions on sticker price and buyer income.
EVs eligible for the credit also must meet escalating percentages tied to how much of the battery components are made or assembled in North America and how much of the battery’s critical minerals are extracted or processed in the U.S. or in a country where the U.S. has a free-trade agreement, or from materials that were recycled in North America.
For Ford Motor Co., which has a licensing agreement with China’s CATL to leverage its technology at a battery plant under construction in Michigan, the guidance could be pivotal as the automaker moves ahead with scaled-down plans at the site.
Republican lawmakers have repeatedly criticized and questioned the automaker’s deal with CATL, citing concerns over whether the arrangement goes against the law’s intent of U.S. energy security and reducing dependence on foreign adversaries for battery materials and manufacturing.
A senior administration official told reporters Wednesday that they have not evaluated any specific plants or automaker situations for compliance with the foreign entity provision.
Rather, automakers will submit their certifications to the IRS for credit eligibility. The Energy and Treasury departments will then work together and may ask for additional information before sending their analysis to the IRS to determine whether a situation triggers the provision.
“Many licensing arrangements will be perfectly fine, but if the licensing arrangement is one that gives a country or company of [a foreign entity of concern] too much control, then that causes significant concern,” said the official, who asked to not be identified.
The Alliance for Automotive Innovation, representing major automakers such as Ford, General Motors and Toyota, said the guidance provides automakers with a much-needed road map for determining which EV battery production and supply chains comply.
“It appears that companies operating in China are considered FEOC. Chinese entities with specific ownership or governance structures might be permitted in certain circumstances,” John Bozzella, the alliance’s CEO, wrote in a blog post Friday.
As for how the provision will affect the number of EVs qualifying for half or all of the tax credit: “Time will tell … but Treasury’s effort to make the rules workable means the list of eligible vehicles won’t completely disappear in 2024,” he wrote.
In defining the provision, the Treasury and Energy departments faced a tough challenge in striking the right balance between the law’s objectives of encouraging EV adoption, building a domestic supply chain and strengthening U.S. energy security.
A too-strict interpretation of the term could be a red light to vehicle eligibility, while a too-lenient approach could threaten the law’s national security and domestic production benefits.
“When the IRA was negotiated, Congress and President Biden agreed that building up secure supply chains for clean energy systems was a top goal,” said Todd Malan, chief external affairs officer and head of climate strategy at Talon Metals.
“We expect these rules to be fully consistent with the security of supply goals of the IRA and that they will prevent Chinese firms from benefiting from U.S. taxpayer-funded incentives like the 30D tax credit,” he said in a statement Wednesday.
Strong foreign entity of concern rules that are enforced by audit and clawback measures, Malan said, “will prevent ‘mineral laundering’ schemes and encourage ‘know your supplier’ systems that can track inputs from mine through to recycling.”
Albert Gore, executive director of the Zero Emission Transportation Association, a group whose members include Redwood Materials, Rivian and Tesla, said the rules should be workable while still accomplishing the law’s multiple goals.
“You don’t want to penalize companies that are locating here, investing in or hiring people here in huge volumes because of where a single part comes from in their supply chain or the existence of a licensing fee for a particular manufacturing process,” Gore said in an interview ahead of the guidance’s release.
In comments filed last year, automakers urged Treasury to specify a “de minimis” threshold for applicable critical minerals or components in the battery and provide guidance on what triggers the foreign entity exclusions.
Guidance released Friday includes a temporary transition rule through 2026 that gives the industry time to develop standards for tracing low-value battery materials and asks for comment on which materials the rule should cover.
Sen. Joe Manchin, D-W.Va., who threatened to sue the Treasury Department in March over how it was planning to interpret the credit’s critical mineral and battery component provisions, urged the administration to impose the “strictest possible standards” for foreign entities of concern.
“Nowhere in the IRA is there a ‘value-added test’ or ‘de minimis’ exception to create loopholes that would allow a foreign entity of concern to participate in any portion of the mining, processing or manufacturing of electric vehicles,” he said in a statement last month. “Both the law and congressional intent are clear on this, and it would be unconscionable to reward bad actors through a loose or deliberately weak interpretation.”