Japan, South Korea Urge US to Ease EV Tax Credit Rules for Foreign Automakers

Nissan Motor's electric vehicle (EV) concept car (L) is displayed at the company's showroom in Yokohama on Nov. 29, 2021. (KAZUHIRO NOGI/AFP via Getty Images)

Japan and South Korea have called on the United States to ease restrictions on electric vehicles (EVs) tax credits, citing the adverse impact of the Inflation Reduction Act (IRA) on foreign automakers.

The IRA was signed into law by the Biden administration on Aug. 16. Japan said that certain provisions of the IRA would deter Japanese companies from investing in the EV market, thereby affecting investment and employment in the United States.

Japan was referring to provisions requiring EVs to be assembled in North America to qualify for tax credits, and battery minerals to be processed in the United States or in nations with which it has a free trade agreement, Kyodo News reported.

The requirements to qualify for tax credits are inconsistent with the U.S.-Japan shared policy of building resilient supply chains and may result in fewer EV options in the U.S. market, Japan’s government said.

Meanwhile, South Korea’s Ministry of Trade, Industry, and Energy sent a letter to Washington on Friday stating that provisions in the IRA may violate their Federal Trade Agreement and World Trade Organization (WTO) rules.

The ministry requested a three-year grace period to allow South Korean companies with planned investments in the United States to continue receiving tax incentives.

South Korea’s government said that it has solicited public opinion on the IRA through meetings with related industries and trade expert consultations.

It proposed expanding the scope of final assembly requirements to allow EVs to be partially manufactured outside the United States and requested that eco-friendly vehicles purchased for rental or lease be qualified as “commercial cars” to be eligible for tax credits.

The U.S. Treasury Department and the Internal Revenue Service started seeking public comment on the new law last month.

Under the law, rules governing the current $7,500 EV tax credit aimed at persuading consumers to buy the vehicles will be replaced by incentives designed to bring more battery and EV manufacturing into the United States.

The domestic content requirements will ratchet up over the next six years.

New restrictions on battery sourcing and critical minerals, along with price caps and income caps, take effect on Jan. 1, 2023, which will potentially make all current EVs ineligible for the full $7,500 credit.

Reuters contributed to this report.