April 2, 2023
Americas Tax Policy: This Week in Tax Policy for March 31
This week (April 3-7)
Congress: The House and Senate are both now out of session for more than two weeks, returning April 17. This Week in Tax Policy won't be published while Congress is away.
Last week (March 27-31)
EV credit guidance: The Treasury Department and IRS March 31 released proposed regulations (REG-120080-22) on domestic sourcing requirements for the Inflation Reduction Act's (IRA) Section 30D electric vehicle (EV) tax credit. Under the IRA, for the $3,750 critical minerals portion of the EV credit, the vehicle's battery must contain a threshold percentage (40% initially, growing to 80%) of critical minerals extracted or processed in the United States or in a country with which the US has a free trade agreement (or recycled in North America). To receive the $3,750 battery components portion, the percentage of the battery's components manufactured or assembled in North America would have to meet threshold amounts (50% initially, growing to 100%). In the regulations, Treasury/IRS said sources of a single applicable critical mineral may have multiple procurement chains if one source of the applicable critical mineral undergoes the same extraction, processing, or recycling process in different locations. An applicable critical mineral would be treated as recycled in North America if 50% or more of the value added to the applicable critical mineral by recycling is derived from recycling that occurred in North America, which IRS said would be a transition rule to be followed by a more stringent test and requested comments on the issue.
A main issue regarding the requirements is the Administration seeking trade agreements with other nations (Japan and the EU) that won't require congressional approval, given that the IRA doesn't define "free trade agreement." The regulations propose to identify the countries with which the United States has free trade agreements in effect for purposes of section 30D consistent with the statute's purposes of promoting reliance on such supply chains and of providing eligible consumers with access to tax credits for the purchase of new clean vehicles, and criteria to be considered in identifying these countries. These include whether an agreement between the US and another country, as to the critical minerals contained in EV batteries or more generally: reduces or eliminates trade barriers on a preferential basis; commits the parties to refrain from imposing new trade barriers; establishes labor and environmental protections; and/or reduces or eliminates restrictions on exports or includes commitments to do so. The proposed regulations include countries with which the US has comprehensive free trade agreements: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. Treasury and the IRS also propose to include additional countries including Japan, with which the United States recently concluded a Critical Minerals Agreement (CMA).
The Wall Street Journal (WSJ) reported: "Administration officials expect the number of vehicles for which consumers can claim the full tax credit to decline temporarily with the introduction of the new criteria. In the long term, they say new domestic vehicle and battery plants being built by U.S. and foreign companies will mean more cars will be eligible. Since the introduction of the Inflation Reduction Act, companies have announced plans to build 75 facilities with a total investment of more than $45 billion, administration officials say." The report also said later guidance will address "foreign entities of concern" and make vehicles ineligible for the tax credits starting next year if their batteries contain any components or critical minerals sourced from certain nations.
Fact Sheet 2023-08 updates FAQs related to new, previously owned and qualified commercial clean vehicles.
Reaction: Senator Joe Manchin (D-WV), who previously suggested the credit should be paused until the guidance is released, was on Wednesday already anticipating an overly flexible interpretation of the rules. Reuters March 29 reported Senator Manchin as saying of the forthcoming EV guidance, "If it goes off the rails" and violates the intent of the climate legislation approved in August, "I will do whatever I can - if that means going to court and I can do it, I'd do it." Senator Manchin released a statement March 31 saying the EV credit guidance "completely ignores the intent of the [IRA]." He said, "It is horrific that the administration continues to ignore the purpose of the law, which is to bring manufacturing back to America and ensure we have reliable and secure supply chains." In a March 29 WSJ op-ed, Senator Manchin more generally called on President Biden "to instruct his administration to implement the Inflation Reduction Act as written and stop redefining its credits and other subsidies."
USTR-Japan deal: United States Trade Representative Katherine Tai and Japan's Ambassador to the United States, Tomita Koji, March 28 signed a Critical Minerals Agreement intended to strengthen and diversify critical minerals supply chains and promote the adoption of electric vehicle battery technologies. Ambassador Tai said, "Japan is one of our most valued trading partners and this agreement will enable us to deepen our existing bilateral relationship. This is a welcome moment as the United States continues to work with our allies and partners to strengthen supply chains for critical minerals, including through the [IRA]." Bloomberg reported, "Following the pact, EVs that use materials that have been collected or processed in Japan will be eligible for incentives under the US Inflation Reduction Act, Japanese trade minister Yasutoshi Nishimura said Tuesday in Tokyo." A similar agreement is being pursued with the European Union.
Superfund: The IRS has issued proposed regulations (REG-105954-22) under IRC Sections 4661, 4662, 4671 and 4672 regarding Superfund taxes imposed on certain chemicals and imported substances as of July 1, 2022. These taxes are imposed on the sale or use of taxable chemicals by their manufacturers, producers and importers. In Revenue Procedure 2023-20, the IRS modifies the effective date for additions to the list of taxable substances under IRC Section 4672(a). The change modifies the date on which substances are added to the taxable substances list for purposes of refund claims under IRC Section 4662(e). In Notice 2023-28, the IRS extended temporary relief provided in Notice 2022-15 regarding deposits of the excise tax imposed on certain chemicals under IRC Section 4661 and on certain imported chemical substances under IRC Section 4671 (referred to as Superfund chemical taxes).
An EY Alert, "Proposed Superfund Tax regulations address many issues, but leave others open," is available here.
Budget/debt limit: There were new exchanges regarding the debt limit impasse, which the Administration and Congress will need to reach agreement on by around mid-year in order to avoid default, given that Treasury is already using extraordinary measures to borrow additional funds without breaching the debt limit. House Speaker Kevin McCarthy (R-CA) challenged President Biden on the debt limit issue in a March 28 letter saying that he is "incredibly concerned you are putting an already fragile economy in jeopardy by insisting upon your extreme position" of refusing to negotiate spending cuts, and that Republicans are united in wanting to "Limit Spending, Save Taxpayer Money, and Grow the Economy." Speaker McCarthy said this could be accomplished through reducing nondefense discretionary spending, reclaiming unspent COVID funds, strengthening work requirements for federal programs, and measures to lower energy costs. White House Press Secretary Karine Jean-Pierre responded with a statement saying, "Congress has a constitutional obligation to address the debt limit — as they did three times in the previous administration without conditions." She said President Biden welcomes a separate conversation about the nation's fiscal future and has released a budget reflecting his vision, but Republicans only have "a list of devastating cuts to law enforcement and border security and proposals to take health care away from Americans and raise health care and child care costs. All to pay for their tax giveaway to the super-wealthy and corporations." The President issued a letter calling on House Republicans to deliver to him a full set of budget proposals before leaving for the Easter recess. Budget Committee Chairman Jodey Arrington (R-TX) has said he expects to release the House Republican FY 2024 budget resolution the second week in May. Punchbowl reported that it will be difficult for House Republicans to pass a budget before the debt limit deadline and for Speaker McCarthy to meet the goals of passing a budget that balances in 10 years and not touching Social Security or Medicare, and that he is considering having the House pass a short-term debt limit increase of just a few months long with some modest budgetary savings provisions. McCarthy downplayed the link between the budget and the debt limit that has been established by the President, "Let's be very honest about this: The budget doesn't have anything to do with the debt ceiling," McCarthy said on CNBC. "I can pass a budget tomorrow, and we'll still need to pass a debt ceiling … These are apples and oranges." Speaker McCarthy later tweeted, "President Biden has already caused record inflation. Now, his reckless refusal to negotiate could lead to a first-ever default. I am prepared to clear my calendar. Mr. President, what are you afraid of?"
Senator Manchin, who is up for re-election in 2024 in a state won by President Trump in 2020, continued to be an outlier among Democrats in calling for negotiations with Republicans over the debt limit. He said in the WSJ op-ed the president should "sit down with fiscally minded Republicans and Democrats to negotiate common-sense reforms to out-of-control fiscal policy. While we can all acknowledge that raising the debt limit is an absolute necessity and Republicans shouldn't threaten otherwise, are we seriously to believe there is no room to negotiate?"