US Inflation Reduction Act Benefits Canadian Firms – Govt. Contracts & Procurement
TL/DR –
The Inflation Reduction Act of 2022 is a significant legislative initiative by the United States to address climate change and promote clean vehicles. The Act amends the clean vehicle tax credit under Section 30D of the Internal Revenue Code, tightening restrictions on foreign entities of concern in the North American supply chain for clean vehicles, and mandating more localization. It allocates approximately US$370 billion for climate-related solutions, primarily through tax incentives, and provides up to a US$7,500 tax credit to purchasers of new clean vehicles.
The Inflation Reduction Act of 2022 (IRA) and its Impact on Clean Vehicle Market
The Inflation Reduction Act of 2022 (IRA) is a key legislative measure by the US to combat climate change and foster the purchase of clean vehicles. A significant change under this act is the amendment to the clean vehicle tax credit under Section 30D of the Internal Revenue Code (IRC). These amendments and the proposed regulations place stricter restrictions on “foreign entities of concern” in the North American clean vehicle supply chain and enforce greater localization. This article will discuss how Canada-based businesses could benefit from the IRA and increase their presence in the US clean vehicle market.
New Clean Vehicle Tax Credit
The IRA assigns around US$370 billion for climate-related solutions, primarily through tax incentives to spur private sector investment in clean energy technologies. Section 30D of the IRC, revised by the IRA, offers a US$7,500 tax credit to purchasers of a “new clean vehicle” at the time of purchase. This credit is split into two parts:
- US$3,750 for a clean vehicle meeting specific critical mineral requirements.
- US$3,750 for a clean vehicle aligning with certain battery component requirements.
Critical Mineral and Battery Component Requirements
The critical mineral requirements relate to the minerals contained in the battery from which the electric motor of a clean vehicle draws electricity. These requirements mandate that a minimum percentage of the value of such critical minerals in the battery must be either extracted or processed in North America or recycled in North America. Battery component requirements insist that a minimum percentage of the value of the components contained in the battery must be manufactured or assembled in North America.
Foreign Entities of Concern
The IRA implements measures to restrict a Foreign Entity of Concern (FEOC) from accessing the US clean vehicle market. FEOCs are classified as foreign entities that are owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a “covered nation”, which includes China, Iran, North Korea, and Russia. To qualify for the new clean vehicle tax credit, a vehicle must not contain battery components or critical minerals manufactured, assembled, extracted, processed, or recycled by an FEOC.
Benefits for Canadian Businesses
Canadian businesses may gain preferential access to the US clean vehicle market due to their geographical proximity and the IRA’s emphasis on sourcing, processing, and recycling critical minerals within North America. This presents new opportunities for these businesses to take advantage of the new clean vehicle credit.
1. White House, “Clean Energy Tax Provisions in the Inflation Reduction Act”
2. Inflation Reduction Act of 2022, Public Law No. 117-169, title I
10. Interpretation of Foreign Entity of Concern, Federal Register
The content of this article aims to provide a general overview of the subject matter. Seek specialist advice about your specific circumstances.
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