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RMG May-12-2023

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U.S. Government’s Policy Updates - Policies for Reorganizing a U.S.-Centric Global Supply Chain | Part 4 – Release of Proposed Guidance on Electric Vehicle Tax Credit Provisions of the Inflation Reduction Act

[DR_AJU] RMG Issue Report - U.S. Government’s Policy Updates.pdf
U.S. Government’s Policy Updates

Policies for Reorganizing a U.S.-Centric Global Supply Chain
Part 4 – Release of Proposed Guidance on Electric Vehicle Tax Credit Provisions of the Inflation Reduction Act



Overview of the Inflation Reduction Act

The U.S. President Joe Biden signed the Inflation Reduction Act (the “IRA”) into law on August 16, 2022. Key points of the IRA include the increase of taxation on the wealthy and large corporations, the reinforcement of tax law to increase tax revenue, and investments in energy security and climate change response programs. According to the U.S. Senate’s budget plan, the U.S. government will be implementing a 15% corporate minimum tax and an excise tax on stock buyback for the next ten years to raise USD 737 billion in revenue. With these funds, the government plans to invest USD 437 billion in policies for energy security and climate change response. In particular, the IRA stipulates that the government shall invest USD 369 billion in energy security and climate change response programs to stabilize the U.S. energy supply chain and bolster the renewable energy industry.

Specifically, the IRA allocates billions of dollars in funding for strengthening energy security and supporting U.S. manufacturing: USD 30 billion in production tax credits for the onshoring of U.S. manufacturing of solar panels, wind turbines, batteries and critical mineral processing; USD 10 billion in tax credits for the construction of clean technology manufacturing facilities (electric vehicles, wind turbines, and solar panels, etc.); and USD 20 billion in loan programs for manufacturing new clean energy vehicles. As for decarbonization policies, the IRA allocates USD 30 billion in subsidies for loans for clean energy conversion and USD 27 billion for deploying clean technology to local communities, and tax credits and subsidies for clean energy storage and clean energy vehicles. Regarding consumer energy, the legislation aims to invest in tax credits for household heat pumps, solar energy and electric HVAC, tax credits for purchasing U.S. vehicles and improving energy efficiency for low-income households.

The IRA includes tax credits to increase the government spending regarding climate and energy and bolster the electric vehicle (“EV”) industry. In particular, the provisions for the tax credit grant subsidies only for EVs produced in the U.S., which has been expected to have a significant impact on the Korean EV industry in the future. Under the IRA, only EVs manufactured in North America will be given differential tax credits based on the percentage of the country of origin of battery components and critical minerals used in such EVs.



Eligibility Criteria for Basic Tax Credit for EV Purchase

Under the IRA, only vehicles whose final assembly and manufacturing takes place in North America are eligible for a tax credit of USD 7,500 per EV starting in 2023. In addition, if 40% of the total critical minerals used to manufacture the vehicle’s batteries are minerals that are mined and processed in countries with free trade agreements with the United States, a tax credit of USD 3,750 will be granted per EV. Starting in 2023, more than 50% of the battery's main components must be from the U.S. or U.S. FTA partner countries to receive tax credits. The percentage of the above critical minerals and main components will increase by 10% every year, with the final percentage requirement for tax credits being 80% in 2027 and 100% in 2029.

The U.S. Department of the Treasury and the U.S. Internal Revenue Service have introduced guidelines that "deduct up to USD 7,500 in tax reporting for the year if the EVs purchased were finally assembled in North America" since the legislation of the IRA of 2022. This was a very relaxed tax credit standard under the IRA, and the U.S. Department of the Treasury has announced that they will strictly apply the battery component requirements from 2023. In this Issue Report, we will take a closer look at the detailed guidance of the IRA, which will take effect from 2023.



Enactment of the Guidance of the IRA and Detailed Provisions

The U.S. Department of the Treasury released detailed guidance for the IRA (the "Guidance") on March 31, 2023, which took effect on April 18, 2023.

The most notable provision of this Guidance is that even if critical minerals are imported from foreign countries, the vehicles are eligible for subsidies if the minerals are processed in the U.S. or in U.S. FTA partner countries and more than 50% of the total added value is created in the countries where the minerals are processed. For example, even if lithium is imported from China, if it is processed into cathode materials in Korea, a U.S. FTA partner country, the critical mineral requirement will be considered to have been met. In addition, if the cathode materials are imported into the U.S. and used for battery manufacturing, they will also be subsidized under the battery component requirement.1

In addition, the Guidance stipulates how “battery component” and "critical mineral" are defined under the IRA. "Battery component" refers to anode plates, cathode plates, separators, electrolytes, copper foil, cell, module, etc., but does not include cathode materials and anode materials. The term "critical mineral" refers to more than 50 kinds of minerals, including lithium, nickel, manganese, cobalt, aluminum, and graphite.



Release of the List of Companies Eligible for the Subsidy under the IRA

The U.S. Department of the Treasury further announced 16 EV models that are eligible for the new EV tax credits of up to USD 75 million under the guidelines on April 17, 2023. The list mostly consists of U.S. vehicles, such as Tesla Model 3, Tesla Model Y, Chevrolet Bolt, Chevrolet Equinox EV, Ford e-Transit, Ford Mustang, etc. Hyundai Motor’s GV70, which is being assembled at its Alabama plant, was excluded from the list because its use of Chinese batteries caused it to fail to meet the battery component requirement to receive subsidies. Kia’s EVs also did not make the list. Several U.S. EVs, including vehicles of Nissan, a Japanese vehicle corporation that had been receiving subsidies for operating factories in North America, were also dropped from the list as they failed to meet the “stricter battery rules.”

Accordingly, Hyundai Motor and Kia have shown movements to accelerate the construction of Metaplant America, a joint plant in Georgia to make EVs and battery cells, and seek ways to replace the Chinese batteries for GV70, which is currently being assembled in Alabama factories, to batteries from North America.



DR & AJU’s Comments

Among the eight major minerals required for battery production, Korean companies have shown a high dependence on China for lithium oxide and lithium hydroxide (81.2%), nickel sulfate (59%), cobalt oxide and cobalt hydroxide (83.3%), manganese sulfate and cobalt sulfate (77.6%), etc.2 Therefore, the Guideline provisions can be considered to be very favorable to Korean battery companies, such as LG Energy Solution, SK On, and Samsung SDI, as they can still be eligible for subsidies if their “critical minerals” are processed in a U.S. FTA country regardless of where the minerals are sourced from. However, in the long run, these companies will need to reduce their dependence on Chinese raw materials, such as critical minerals, including lithium and nickel, to achieve market dominance in the U.S.

Although Hyundai Motor and Kia did not make the list for IRA subsidies, the overall number of competing companies that receive government subsidies has also decreased due to the new strict battery component requirements of the IRA. At least for 2023, experts agree that the situation is not unfavorable to Korea. However, in order to secure long-term competitiveness, production facilities eligible for subsidies should be secured as soon as possible.

DR & AJU's Washington, D.C. Liaison Office and D&A Advisory, Inc. provide services that deliver accurate and crucial information and help companies operating in the U.S. establish effective response strategies to policies like the IRA.

DR & AJU will continue to closely monitor updates of the U.S. Congress and government policies on the IRA in order to respond expeditiously through close cooperation with businesses when necessary.




RMG Introduction

DR & AJU’s Risk Management Group (the “RMG”) is founded with the purpose to prevent and minimize corporate risks for companies in Korea. RMG's goal is to create a favorable business environment by providing strategic solutions to prevent, manage, and minimize various risks a corporate entity may face doing business domestically or globally.

DR & AJU RMG provides various risk management services from pre-transaction investigation, strategic research, field investigation, to review of a potential dispute, monitoring, and representing in litigations and post-litigation follow-up work. Furthermore, RMG aims to be a strategic partner to our clients in their creative management by predicting and preparing political and regulatory risks due to changes in global dynamics or political landscape that our clients may face in or out of Korea.

DR & AJU RMG team is comprised of experienced lawyers of various backgrounds, including the prosecution, police, politicians, administration officials, military generals and intelligence officers, national security authorities, North Korea experts, investigators, computer forensics experts, and financial and media experts.


 
  1. Lithium-ion batteries used in EVs are largely divided into: (i) "anode plates" that determine the performance of EVs, such as mileage and output; (ii) "cathode plates" that determine battery charging speed and life; (iii) "electrolytes" that carry lithium-ion between anode and cathode; and (iv) "separation" that separates anode and cathode and serves as a path for lithium-ion to pass.
     
  2. Maeil Business Newspaper, "Explosive Expansion of US Local Manufacturing Companies for K Batteries...Anticipating up to KRW 15 trillion in subsidies," March 31, 2023

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