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U.S. Treasury says consumer leases can qualify for EV tax credits

The U.S. Treasury Department said Thursday that electric vehicles leased by consumers starting Jan. 1 can qualify for up to $7,500 in commercial clean vehicle tax credits, a decision that makes those assembled outside North America eligible.

The announcement is a win for South Korea and some automakers that earlier this month sought approval to use the commercial electric vehicle tax credit to boost consumer EV access. Automakers said the credit could be used to reduce leasing prices.

The $430 billion U.S. Inflation Reduction Act (IRA) passed in August ended $7,500 consumer tax credits for purchases of electric vehicles assembled outside North America, angering South Korea, the European Union, Japan and others. The new Treasury guidance does not change the definition of what constitutes North American assembly to make more vehicles eligible for EV purchases.

Treasury said it was using “longstanding tax principles” to determine consumer leasing could qualify for the EV tax credit.

The IRA also imposes significant battery minerals and component sourcing restrictions, sets income and price caps for qualifying vehicles and seeks to phase out Chinese battery minerals or components. The commercial credit does not, however, have the sourcing restrictions of the consumer credit.

Senator Joe Manchin, a Democrat who chairs the chamber’s energy panel, urged Treasury to pause implementation of both commercial and new consumer EV tax credits and said they had bent “to the desires of the companies looking for loopholes” and would seek new legislation that “prevents this dangerous interpretation from Treasury from moving forward.”

Toyota Motor (7203.T) said earlier “the lack of criteria to qualify for (commercial credits) could undermine the IRA’s goals to expand domestic production of EV batteries and maintain America’s energy independence.”

That law lifts the 200,000-vehicle per manufacturer cap that had made Tesla (TSLA.O) and General Motors (GM.N) ineligible for EV tax credits starting Jan. 1. The Internal Revenue Service released an initial list of eligible 2023 EVs Thursday that includes Ford Motor (F.N), Rivian (RIVN.O), Chrysler-parent Stellantis (STLA.MI) and Nissan (7201.T) EVs for the consumer tax credit and plans to release a more comprehensive list by Saturday.

On Dec. 19, Treasury said it would delay until March releasing proposed guidance on required sourcing of EV batteries. This means some EVs that do not meet the new requirements may have a brief window of eligibility in 2023 before battery rules take effect.

Half the credit is contingent on at least 40% of the value of the critical minerals in the battery having been extracted or processed in the United States or a country with a U.S. free-trade agreement, or recycled in North America, a percentage requirement that rises annually.

Treasury said Thursday its definition of a free trade agreement will at least include existing comprehensive trade agreements with Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore.

The United States could negotiate additional qualifying free trade deals with allies in the coming months. Treasury said it “will evaluate any newly negotiated agreements for proposed inclusion” as it finalizes the EV rules.

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