EV tax credits: A whole lot of speculation, interpretation — and lawsuits?

It seems we had a moment of controlled and relatively calm chaos after the passage of the Inflation Reduction Act (IRA), only to now be thrown back onto the roller-coaster ride, strapped in and launched onto a Treasury-induced stomach turner.

The Treasury Department recently published its long-awaited guidance on EV critical minerals and battery components relating to EV tax credit eligibility — clearing up some confusion and creating new ones along the way. And you guessed it, Sen. Joe Manchin is not happy.

On March 29, I attended the SAFE Summit in Washington, D.C., an industry-specific event looking at the pathway to electrification from minerals to market. The agenda included a closing keynote discussion by Manchin.

Known for his centrist views, which often differ from the current administration, Manchin laid out his feelings in a comedic, candid and clear way as he shared how, at that moment, he feared the administration was going around congressional intent by interpreting the EV tax credit provisions of the IRA to widen the scope of its meaning.

Manchin published an opinion piece in The Wall Street Journal shortly after the summit. In the piece, he also didn’t hold back, saying the administration is subverting the law’s intent for “ideological ends.”

Sandwiched in between his many points of contention with the administration, Manchin pulled in the audience and shared his thoughts on what’s currently going on in Washington, D.C. As I listened, several things stood out to me — most notably that the man is in a pickle, caught between taking a strong stand against the administration and being seen as attacking the IRA.

Manchin’s tug of war with the Biden administration

During the summit, Manchin threatened legal action against the IRA should the administration broaden Congress’ intent through its interpretation. He immediately followed those comments by sharing his absolute love of the IRA. And what’s not to love? While no law is perfect, the IRA is creating massive waves on the climate front by spurring industry innovation and change globally.

However, even with this positive impact, Manchin is upset. The West Virginia senator shared what we all know to be true and in theory, politically intelligent — if the U.S. is going to move to EVs, then it must do so with a reliable supply chain, one that isn’t impacted by geopolitical battles. And by that, Manchin’s real crux of concern is with a supply chain connected to China.

Now fast forward to a few days after the summit, and the administration’s long-awaited interpretations and guidance on the EV tax credits are out. Overall, the guidance provides much-needed clarity for the automotive industry to move forward.

“The proposed rule does a great job threading a difficult needle of balancing the IRA’s goals by increasing access to electric vehicles while securing the supply chain for critical minerals and batteries,” Albert Gore, executive director of the Zero Emission Transportation Association, said in an email to me. “The guidance released by the Treasury Department gives manufacturers the information they need to make investments that will create millions of jobs across the country over the next decade, and gives automakers the ability to confidently communicate eligibility of new electric vehicles to consumers.”

Numerous articles have come out discussing the current state of the EV tax credit, interpreting the interpretations and sharing pockets of insights as to what may come next. Here is a great one from a legal perspective by Judy Kwok, a tax partner at Linklaters, a global law firm, and here is one providing a general overview. Overall, three points stand out to me:

1. The guidance is very confusing for the public.
2. What’s a “foreign entity of concern?”
3. What’s Manchin’s next move, if any? 

Everything is just way too confusing for the public

Which vehicles qualify, when will they no longer qualify and for what exact dollar amount are some of the questions swirling around on this ride. 

Websites exist that show which vehicles qualify, but that will change come April 18, when automotive companies share which of their vehicles meet the new requirements. Additionally, in January 2024, the tax credit changes to a point of sale, potentially bringing with it a new set of questions.

What’s a ‘foreign entity of concern?’ 

The legal text of the IRA points to a definition of what’s considered a “foreign entity of concern,” which for purposes of our conversation, includes a “foreign entity that is owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation” as written in the statute. China and Russia are on the list of covered nations. 

Why does this matter? Well, in releasing this guidance, which was supposed to provide clarity to the market, the administration punted on providing details on what’s considered a foreign entity of concern as it relates to critical minerals exclusion and battery components exclusion. The administration said that is in the works, to be released “at a later date.” 

In speaking with Kwok, she shared her insights on the newly released language. “The guidance did provide clarification on what it takes to meet the critical minerals and battery components requirements, but it did not provide guidance on the critical minerals and battery components exclusions, which is very important because there is a lot of ambiguity around what constitutes a foreign entity of concern,” Kwok said. “The IRS could go either way: They could take a very harsh view on what’s considered a foreign entity of concern, or they could take a looser view.”

What’s interesting here is that automakers such as Ford and now possibly Tesla are partnering with Contemporary Amperex Technology Co. (CATL), a Chinese company and the largest battery maker in the world, to license their technology to build North American battery manufacturing plants. This news stands out because, at least for Tesla, such news, while not 100 percent confirmed, came out close to the same time as the guidance was issued. It initially appears that these automakers are walking a perfectly balanced line, ensuring they still are eligible for the full $7,500 but don’t fall into a possibly wide interpretation of what’s considered a “foreign entity of concern.”

Walking the fine line is tough because while the IRA points to a plain language definition, interpretations of what’s considered indirect ownership, controlled by or subject to the jurisdiction are up for question still. “So right off the bat, if you’re legally incorporated in China, there’s a pretty good chance you’re a foreign entity of concern. Where it gets a little trickier is, for example, what does indirect or partial ownership by a Chinese-incorporated entity mean,” Kwok said.

Of course, we’ll soon find out more. Until then, check out this Bloomberg article that clearly discusses the CATL topic.

Manchin’s next move

At this point, the roller-coaster ride has taken me and so many others on several nauseating spins. At the same time, I entirely understand what both sides — Manchin and the administration — are striving for.

Manchin wants to protect the supply chain and the administration I’m sure also wants that but even more, is feeling the pressure of progress and wants to increase EV sales while also aligning with allied nations such as Japan and the European Union. However, what will Manchin do? Will he act on his threats, what can he really do and what impact will his actions have on the overall adoption of EVs in the U.S.?

One interesting point to note from the guidance is around the language on severability. The guidance states that “if any provision in this proposed rulemaking is held to be invalid or unenforceable facially, or as applied to any person or circumstance, it shall be severable from the remainder of this rulemaking …” Kwok shared her reactions on this as well. “As a tax lawyer, that is very unusual for proposed regulations to anticipate out of the gate that part of it might be challenged and struck down,” Kwok said.

In some way, it may seem like the administration is anticipating challenges in advance. On the flip side, recent analysis has come out suggesting Manchin might not have standing to bring a lawsuit. However, alternative legal paths might still exist. 

Only time will tell what comes of this continued political battle. But one thing is for certain — if we thought the roller-coaster ride ended with the passage of the IRA, then we were dead wrong.