USA, 11 July 2023: The Inflation Reduction Act (IRA) of 2022 includes a new tax credit for electric vehicles (EVs) that use batteries containing critical minerals. To qualify for the full credit, the EV battery must have a certain percentage of the value of the applicable critical minerals, and those minerals must be extracted or processed in the United States or in a country with which the United States has a free trade agreement (FTA).
What is a “Free Trade Agreement” under the IRA?
The IRA does not define the term “free trade agreement.” However, the IRS has provided guidance on what constitutes a qualifying FTA for purposes of the IRA tax credit. To qualify, the FTA must meet the following four criteria:
- It must reduce or eliminate trade barriers on a preferential basis.
- It must commit the parties to refrain from imposing new trade barriers.
- It must establish high-standard disciplines in key areas affecting trade (such as core labor and environmental protections).
- It must reduce or eliminate restrictions on exports or commit the parties to refrain from imposing such restrictions on exports.
The following countries are currently considered to have qualifying FTAs with the United States for purposes of the IRA tax credit:
- Costa Rica
- Dominican Republic
- El Salvador
- South Korea
The United States is also in negotiations with the European Union and the United Kingdom to reach agreements that would qualify their countries for the IRA tax credit.
The IRA tax credit for EVs is a significant incentive for the development of the EV market in the United States. The qualifying FTA criteria provide a clear framework for manufacturers to meet the requirements of the credit and ensure that their vehicles are eligible for the full benefit.
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