The new Inflation Reduction Act, which has alarmed the European Union and other trading partners, includes a revised tax credit for electric vehicles. On Thursday, the Biden administration signalled some flexibility in how it would enforce this provision.

In a new “white paper” released on Thursday, the Treasury Department said it would adopt a broad definition of which nations have “free trade agreements” with the United States. This would make it easier for certain foreign automakers to be eligible for at least a portion of the credit that favours cars made in the United States.

The new advice is very clear that an electric vehicle’s final assembly must take place in the United States, Canada, or Mexico in order to be eligible for the full tax credit. That might still disqualify the vast majority of imported cars from the full $7,500 tax credit that buyers of new electric vehicles are entitled to. In March, Treasury will put up a more thorough proposal for the tax credit.

Trade tensions between the United States and other major auto-producing nations including France, Germany, South Korea, and Japan have increased as a result of the bill and its new electric vehicle tax credit provision. President Joe Biden has received public fears from European officials, in particular, that the tax credit and other IRA features that support U.S. clean energy could spell the end for European industry as investment is diverted to the United States. Congressmen have made no apologies, claiming that they drafted the measure to increase the manufacture of electric vehicles and U.S. jobs.

On Thursday, Treasury released a draught list of the vehicles that are eligible for the credit; they anticipate that list to grow as additional manufacturers contact them. The list of vehicles the Energy Department has previously stated are qualified for the credit may still be shorter.

Congress also established a different tax credit for clean commercial vehicles, which is less restrictive than the one for sales of new passenger cars and may present some chances for foreign suppliers. To assist manufacturers and consumers in navigating the complexities of the new tax credit, Treasury has issued answers to a list of “Frequently Asked Questions.”

Why nations are worried The $7,500 consumer tax credit for electric vehicles was immediately subject to the Inflation Reduction Act, which Biden signed into law on August 16.

Prior to this change, EVs built outside of North America were still eligible for the credit, but each automaker was only allowed to max out at 200,000 vehicles.

The EU, Japan, and South Korea were enraged by the new North American assembly criteria, which removed numerous overseas-produced electric vehicles that had previously qualified and raised the possibility of a WTO legal challenge.

The European Union (EU), where major automakers like Volkswagen, BMW, and Mercedes-Benz are based, is worried that the EV tax credit would drive investment away from Europe and toward the US. But South Korea is worried about the opposite thing.

Hyundai, the country’s largest automaker, has already made plans to erect a $5.5 billion electric vehicle manufacturing facility in Georgia, which won’t start operating until 2025.

In order to continue importing cars that are eligible for the credit until the Georgia facility begins producing them, South Korea has requested Treasury for a grace period. Treasury’s white paper, though, makes no mention of that problem, potentially leaving the automaker in the dark.

Important battery provisions: The Thursday-released guidance gives international battery manufacturers for electric vehicles greater cause for optimism. With the introduction of distinct regulations beginning on January 1 for essential minerals and other battery components, Congress hoped to increase domestic production. Additional rules that go into effect in 2024 will also bar cars with components and materials from China from being eligible for the tax credit.

The key minerals in the battery must be harvested or processed in the United States or in any nation with which the United States has a free trade agreement for 40% of their value to be eligible for a share of the tax credit. By 2027, it will reach an 80 percent level. In order to qualify, the necessary minerals could also be reprocessed in North America.

The United States now has formal free trade agreements with 20 nations, including those in Asia, Latin America, Africa, the Middle East, Canada, Mexico, and South Korea.

Treasury stated that as there is no definition of the term “free trade agreement” in the IRA or any other statute, the department was allowed to define it however it saw fit. This would increase the number of nations that qualify for the tax credit, including the European Union, which does not have a formal trade agreement with the United States.

In a notice of proposed regulation that it intends to publish in March, Treasury said it will provide a set of requirements for what qualifies as a free trade agreement with the United States.

Additionally, Treasury and the IRS “expect to propose that the Secretary may identify additional free trade agreements for purposes of the critical minerals requirement going forward and will evaluate any recently negotiated agreements for proposed inclusion during the pendency of the rulemaking process or inclusion after rulemaking is finalised.”

Starting in 2023, at least 50% of the vehicle’s battery components must be produced or built in North America in order to be eligible for the other share of the tax credit. By 2029, that criterion will be 100 percent.

Unlike the vital minerals content criteria, the IRA did not grant any exceptions for components made or assembled in FTA nations.

Tax credits for commercial vehicles: Taxpayers who purchase electric or other environmentally friendly vehicles for their company’s operations may also be eligible for a different tax credit with less onerous requirements than those for vehicles sold to consumers directly.

For foreign manufacturers who lease electric vehicles in the United States, that would offer a substantial market. They must be careful not to include clauses in the lease that would cause the IRS to reclassify it as a sale, according to Treasury.