February 8, 2023

IRA’s EV Tax Credit Sparks International Discord

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The Inflation Reduction Act (IRA) of 2022 is a federal law, the provisions of which obviously apply only to U.S. taxpayers. But the IRA’s impact has been international. Specifically, the European Union (EU) has contended that the law’s tax credit for electric vehicles (EVs) puts European automotive manufacturers at a competitive disadvantage.

The IRA modified the EV credit with changes that will be phased in over time. Already in effect, though, is that qualifying “clean” vehicles must be assembled in North America. The maximum value of the credit is $7,500, based on a calculation based on a vehicle’s battery capacity and other factors. The White House’s new Clean Energy for All website explains the revised credit and includes a list of vehicles that qualify if purchased in 2022 or 2023.

Discourse on the Issue

On December 1, 2022, President Biden touched on the controversy, saying that the IRA’s energy provisions weren’t meant to negatively impact Europe. He implied there could be “tweaks” to accommodate countries outside of North America but didn’t elaborate on how such changes would be made.

A few days later, on December 4, Ursula von der Leyen, President of the European Commission (the executive arm of the EU), gave a speech to the College of Europe in Bruges, Belgium. In it, she said that the IRA may “lead to unfair competition, could close markets, and fragment the very same critical supply chains that have already been tested by COVID-19.”

She clarified that, while competition is a good thing and drives down prices for green technologies, such “competition must respect a level playing field.” Von der Leyen said there should be a “race to the top” that creates jobs and makes clean energy “more affordable worldwide.”

The very next day, the third U.S.-EU Trade and Technology Council Ministerial Meeting was held at the University of Maryland. At a joint press conference following the meeting, U.S. Secretary of State Antony Blinken stated:

"We’ve heard concerns clearly from our European friends about specific aspects of the [IRA]. As soon as we heard those concerns, we agreed to establish a task force between the United States and the [EU] that is up and running. I think we advanced that discussion. I’m convinced that we’re continuing to give momentum to that conversation and to working through the differences."

A draft of a joint statement by U.S. and EU officials proclaimed that the United States aims to address the EU’s frustrations “constructively."

Federal Guidance Released

On December 29, 2022, the U.S. Department of the Treasury and the IRS issued guidance on certain “clean vehicle” provisions of the IRA. According to an accompanying press release, the guidance “provides greater clarity to consumers and businesses that, beginning January 1, 2023, will be able to access tax benefits from the law’s clean vehicle provisions.”

Also included in the guidance is language explaining that EU companies will be able to benefit from certain credits without needing to alter their business models. But, as of this writing, it remains unclear how the IRA will be implemented to allow this to happen.

In a statement issued the same day as the guidance, the European Commission declared “[The] guidance issued today by the U.S. reaffirms that EU companies can benefit from the Commercial Clean Vehicle Credit scheme under the Inflation Reduction Act.” However, the statement went on to say, “This scheme remains of concern to the EU, as it contains discriminatory provisions.”

Increasingly Common

Stay tuned for further developments as the U.S. government and the EU seek to work out matters related to the IRA, as well as other issues related to competition and taxation in today’s global marketplace. It’s imperative that they do so, as many experts predict EVs will continue becoming more common. Please reach out to our team for more information.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

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