Proposed Rule Requires Automakers to Track EV Battery Components

At a glance

• The main takeaway: A proposed Treasury rule would require automakers to track nearly all EV battery components.
• Impact on your business: The proposed rule would require businesses to source components from North America and avoid any components linked to “foreign entities of concern,” namely China, for vehicles assembled in North America.
• Next steps: Aprio encourages impacted taxpayers to share feedback and opinions on the new rule directly with the Treasury and your congressional representatives.

The full story:

In early December 2023, the U.S. Treasury Department released a proposed rule requiring automakers to track most electric vehicle battery components. Without the proposed tracking requirements, consumers will not receive the full $7,500 tax credit for EVs. The proposed rule applies only to vehicles whose “final assembly” occurs in North America.

Under the rule, automakers would be required to track cathodes, anodes, electrolytes, and separators, among other components, in an effort to secure the North American supply chain and avoid processed or mined minerals from “foreign entities of concern” (FEOC).

Here are additional key points:

• EV battery components linked to a FEOC are ineligible for the tax credit.
• A foreign entity of concern is an entity related to the Chinese government or the Chinese government’s influence, as well as the governments of Russia, North Korea, and Iran.
• An automaker with 25% or more of its board seats, voting rights, or equity interest held by a FEOC is considered a full FEOC.
• Whether an entity is a FEOC is determined as of the time of the entity’s performance of extraction, processing, or recycling (for critical minerals), and manufacturing or assembly (for battery components).
• The determination of whether an applicable critical mineral is FEOC-compliant is determined at the end of processing or recycling the mineral into a constituent material.
• The qualified manufacturer initially determines whether a battery is FEOC-compliant, and FEOC-compliant components and critical minerals must be physically tracked to specific battery cells. However, FEOC-compliant critical minerals and associated materials (but not battery components) may be allocated to battery cells without physical tracking, and automakers may apply the transition rule for non-traceable battery materials. Additionally, battery components are physically tracked to specific batteries.
• FEOC-compliant battery components must be physically tracked to specific battery cells, and the mass of FEOC-compliant applicable critical minerals and their associated constituent materials must be physical tracked to specific battery cells.
• The determination of whether an applicable critical mineral is FEOC-compliant takes into account each step of extraction processing, or recycling.
• A constituent material is associated with an applicable critical mineral if the applicable critical mineral has been processed or recycled into a constituent materials, even if the processing or recycling transformed the mineral into a form not listed in the rule.
• If the critical mineral is fully consumed in the production of constituent material or battery component and no longer remains in the battery, it is disregarded.
• Recycled materials are subject to the rule if the recyclable material contains and applicable critical mineral, contains material that was transformed from a critical mineral, or if the recyclable material is used to produce a critical mineral.
• Third-party manufacturers and suppliers are contractually required to provide information sufficient to establish a basis for determining compliance.
• Restrictions on battery components begin January 1, 2024.
• Another set of restrictions on applicable critical minerals would begin in 2025.
• The proposed rule would permit exemptions for low-value components, such as hard-to-trace critical minerals in electrolyte salts.
• Batteries and components would be tracked by a serial number or other identification.
• The affected EVs must have a gross vehicle weight rating of less than 14,000 pounds.
• The person or business selling the EV must furnish a report to the taxpayer buying the car and to the Secretary of the Treasury.
• Public comments about the proposed rule must be submitted by January 18, 2024.

The bottom line:

The newly proposed rule signals sustained, long-lasting attention on U.S. supply chains, particularly in the rapidly-expanding EV market. Contact an Aprio advisor to discuss further impacts of these changes to your business. We have a diverse team of specialists from our international and ESG tax service lines monitoring this news for additional changes.

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