Notice 2023-62: New Rules for Clean Vehicle Tax Credits

The Internal Revenue Service (IRS) and the Department of the Treasury have released final regulations for the clean vehicle tax credits under Section 30D of the Internal Revenue Code. Stemming from the Inflation Reduction Act (IRA), this guidance introduces rules to help manufacturers and consumers navigate the new requirements. The regulations focus on reshaping vehicle supply chains by addressing the sourcing of battery components and critical minerals. They also formally define a “Foreign Entity of Concern” (FEOC) to determine a vehicle’s eligibility, aiming to bolster domestic manufacturing.

Defining the Foreign Entity of Concern Restriction

The regulations define a Foreign Entity of Concern (FEOC), a concept for determining tax credit eligibility. An entity is designated as a FEOC if it is headquartered in, incorporated in, or performs relevant activities in a covered nation. The list of covered nations includes the People’s Republic of China, the Russian Federation, the Democratic People’s Republic of North Korea, and the Islamic Republic of Iran. This definition sets the geographic and governmental boundaries for the restrictions.

An entity also qualifies as a FEOC if it is subject to the jurisdiction of a covered nation’s government or is owned or controlled by such a government. The regulations establish that control exists if 25% or more of an entity’s board seats, voting rights, or equity interest are held by the government of a covered nation. These metrics are measured independently, with the highest percentage used for the determination. The definition also extends to licensing agreements that grant an FEOC effective control.

The direct consequence of this rule is a phased-in exclusion from the up to $7,500 clean vehicle credit. Beginning in 2024, a vehicle is ineligible if any of its battery components were manufactured or assembled by a FEOC. The restrictions tighten in 2025, when the exclusion expands to any vehicle containing critical minerals that were extracted, processed, or recycled by a FEOC. This timeline incentivizes automakers to reconfigure their procurement strategies.

Under this framework, a subsidiary of a FEOC may also be considered a FEOC, even if not located in a covered nation. The determination depends on whether the subsidiary is controlled by a covered nation’s government, either directly or through its parent company. The Department of Energy provides interpretive guidance to help automakers navigate these complex ownership structures.

Guidance on Battery Component and Critical Mineral Sourcing

The final regulations provide specific definitions for key supply chain activities to determine if materials are compliant. “Extraction” refers to the process of removing critical minerals from the ground or a brine deposit. “Processing” is defined as the transformation of minerals into constituent materials. “Recycling” is the recovery of minerals and materials from used batteries. These definitions are meant to eliminate ambiguity for manufacturers tracing their battery inputs.

To assist with compliance, the guidance establishes a safe harbor for calculating the value of critical minerals and battery components. This allows manufacturers to use a simplified method for determining the percentage of a battery’s value that complies with sourcing requirements. For critical minerals, the calculation focuses on the value added during the extraction and processing stages, providing a consistent methodology for certification.

The rules also address tracking low-value materials. For certain materials that are difficult to trace, such as those in electrolyte salts and electrode binders, the guidance provides a temporary exemption. These materials, which the IRS notes account for less than two percent of the value of critical minerals, can be excluded from due diligence and tracing requirements until January 1, 2027. This transitional rule provides manufacturers additional time to develop more robust tracking systems.

This framework for material sourcing works in tandem with the FEOC restrictions. A vehicle must satisfy both sets of requirements to be eligible for the full tax credit. The regulations clarify that manufacturers must conduct due diligence to track the supply chain from the mine to the final battery assembly to ensure compliance.

Manufacturer Compliance and Attestation Process

To claim the clean vehicle credit, manufacturers must adhere to a compliance and attestation process. This procedure requires manufacturers to submit detailed information to the IRS demonstrating that their vehicles meet all requirements. This includes providing certifications that the vehicle’s battery does not contain components or critical minerals from a Foreign Entity of Concern (FEOC).

The process involves a formal attestation submitted to the IRS. In this attestation, the manufacturer must declare, under penalty of perjury, that they have conducted due diligence to verify their supply chain. This due diligence requires a system for tracking battery components and critical minerals to their origin. The IRS, with assistance from the Department of Energy, will review these submissions.

Manufacturers are required to establish a compliant-battery ledger for each calendar year. This ledger must track the number of compliant batteries—those that meet both the critical mineral and battery component requirements—that are installed in vehicles. The information from this ledger forms the basis of the reports submitted to the Treasury and IRS.

If a manufacturer’s submission is found to be inaccurate or insufficient, the vehicles in question may be deemed ineligible for the credit. The regulations establish a review process for these FEOC-compliance determinations and outline potential penalties for non-compliance. The burden of proof is on the manufacturers to maintain a transparent and verifiable supply chain.