{"id":11159,"date":"2023-05-18T10:07:08","date_gmt":"2023-05-18T17:07:08","guid":{"rendered":"https:\/\/www.qad.com\/blog\/?p=11159"},"modified":"2023-05-18T10:08:44","modified_gmt":"2023-05-18T17:08:44","slug":"how-the-inflation-reduction-acts-ev-tax-credit-will-reshape-supply-chains","status":"publish","type":"post","link":"https:\/\/www.qad.com\/blog\/2023\/05\/how-the-inflation-reduction-acts-ev-tax-credit-will-reshape-supply-chains","title":{"rendered":"How the Inflation Reduction Act\u2019s EV Tax Credit Will Reshape Supply Chains"},"content":{"rendered":"

[vc_row][vc_column][vc_single_image image=”11162″ img_size=”full”][vc_column_text]The <\/span>automotive<\/span><\/a> industry is undergoing a massive technological transformation toward vehicle electrification and the shift presents huge opportunities for manufacturers that do business in the US, especially since the passage of the Inflation Reduction Act in August 2022. The trend also stands to shake up the global electric vehicle (EV) and battery supply chain, and companies that act decisively now will be more likely to come out on top.<\/span><\/p>\n

Companies have funneled more than <\/span>$45 billion<\/span><\/a> into EV production and battery supply chains in the US since the bill was signed into law, and that figure is only expected to grow as the Treasury Department and Internal Revenue Service (IRS) release additional guidance on qualifying for related tax credits.<\/span><\/p>\n

As was discussed in a <\/span>recent blog post<\/span><\/a>, one of those is the Section 30D New Clean Vehicle Credit. A new proposed rulemaking was published in the Federal Register on April 17, 2023, and it contains new critical mineral and battery component requirements that could change how manufacturers and suppliers that market their EV products in the US do business.\u00a0<\/span><\/p>\n

What\u2019s in the Inflation Reduction Act\u2019s New Clean Vehicle Credit?<\/span><\/h2>\n

The Inflation Reduction Act contains different tax credits for EVs depending on whether they\u2019re new, used or designed for commercial use. The New Clean Vehicle Credit will be the most significant for the <\/span>automotive<\/span><\/a> industry because it will influence how new EV components and batteries are manufactured and distributed in the US.\u00a0<\/span><\/p>\n

With the credit, consumers could save up to $7,500 on a new clean vehicle if it meets Inflation Reduction Act-mandated requirements for critical minerals and battery components. Those sourcing requirements are scheduled to increase by 10% every year beginning in 2023. Vehicles that meet one of the two requirements will be eligible for half of the $7,500 credit \u2013 but you can bet consumers are going to want the full amount, and that\u2019s why it\u2019s important for automotive manufacturers to begin preparing for supply chain and production changes now.<\/span><\/p>\n

It\u2019s also important to know that for a clean vehicle to be eligible for the tax credit, final assembly must take place in North America and it may not exceed a Manufacturers Suggested Retail Price (MSRP) of $55,000 unless it\u2019s a sport utility vehicle, van or pickup truck. The maximum MSRP for those products is $80,000.<\/span><\/p>\n

Critical Mineral Requirement<\/span><\/h3>\n

Lithium, cobalt and many other critical minerals are critical for clean vehicle batteries, yet they\u2019re already in short supply due to geopolitical issues, cost inflation, supply chain disruption and <\/span>forced and child labor<\/span><\/a> concerns. The Inflation Reduction Act aims to ensure critical minerals are sourced ethically and sustainably, as well as in a manner that helps stimulate US manufacturing growth.<\/span><\/p>\n

Under the New Clean Vehicle Credit, a certain percentage of critical minerals in the vehicle\u2019s battery must be extracted or processed in the US or another nation with a <\/span>free trade agreement<\/span><\/a> (FTA). The applicable percentage for 2023 is 40% and it will increase by 10% every year until reaching 80% in 2027.<\/span><\/p>\n

The proposed rulemaking also contains a three-step process for verifying batteries meet those critical mineral thresholds. The approach calls for a deeper look at procurement chains, critical mineral qualification and the calculation of mineral content.<\/span><\/p>\n

Battery Component Requirement<\/span><\/h3>\n

As I mentioned earlier, companies have already earmarked more than $45 million for clean vehicle and battery supply chain investments in the US, and that makes a lot of sense when this requirement is broken down. Qualifying clean vehicles must use a certain percentage of battery components that are manufactured or assembled in North America \u2013 and it\u2019s steeper than the Critical Mineral Requirement.<\/span><\/p>\n

The applicable percentage is 50% for 2023 and increases by 10% every year until reaching the 100% threshold in 2029. That\u2019s right. By 2029, all clean vehicle battery components must be produced or assembled in North America to qualify for 50% of the Inflation Reduction Act\u2019s New Clean Vehicle Credit.<\/span><\/p>\n

Another area to watch is the Clean Vehicle Tax Credit\u2019s \u201cforeign entity of concern\u201d (FEOC) provision. This yet-to-be-defined provision will begin applying to battery components in 2024 and critical minerals the following year.<\/span><\/p>\n

The Inflation Reduction Act does not directly define FEOCs, but it does <\/span>allude<\/span><\/a> to China, Russia, North Korea and Iran falling within that category. The Treasury Department is expected to release additional guidance later this year.<\/span><\/p>\n

Other Nations Want to Maximize Clean Vehicle and Battery Opportunities, Too<\/span><\/h2>\n

The Inflation Reduction Act clearly contains some powerful provisions to attract automotive manufacturers and suppliers to the US, but some critics \u2013 and perhaps rightfully so \u2013 are concerned that the US\u2019 tax credits could damage their domestic industries and make it tough to compete. The EU and other nations are advancing legislation or working on free trade agreements to keep a coveted spot in the evolving clean vehicle and battery supply chain.<\/span><\/p>\n