Tax Credit on Leased EVs: Loophole for European, Asian Automakers?

BRUSSELS – European and Asian automakers exporting electric vehicles to the U.S. are looking to take advantage of U.S. Treasury guidance that allows consumers to claim tax credits of up to $7,500 on leased EVs, even if they are not made in North America.  

That remains a requirement for U.S. consumers wishing to claim a credit under the Inflation Reduction Act (IRA) when buying a new EV, but the relaxation of leasing rules will help a wide range of listed manufacturers based outside the U.S., Canada and Mexico. According to the Internal Revenue Service, this includes majors such as Honda, Audi, Volkswagen, BMW, Hyundai, Jaguar Land Rover, Kia, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Porsche, Subaru, Toyota, Volvo and others. 

While the European Union executive, the European Commission, is still unhappy that EU auto exporters remain locked out of the new-vehicle-purchase credit, it is welcoming the flexibility on leased foreign EVs: “This is a win-win for both sides, as it strengthens EU-US cooperation in our shared goal of fighting climate change and bolsters transatlantic supply chains...EU companies that provide their customers, through leases, with cutting-edge clean vehicles can benefit from the incentives under the IRA.” 

The U.S. auto leasing market is large. According to Statista, a Germany-based market data company, almost a fifth of new vehicles obtained by American consumers in 2022 were leased. That is part of a U.S. passenger car market that Statista projects will generate $553.7 billion in revenue during 2023, rising to $584.8 billion by 2027. SUVs remain the largest segment for European and Asian exporters to target with leases, with Statista projecting an overall market volume of $301.6 billion in 2023. 

EV leasing screenshot (Getty)_0

There is certainly room for growth in European Union EV exports to the U.S. A European Automobile Manufacturers Assn. spokesperson says she “welcomes the clarity given on the eligibility criteria.” She adds: “Leasing arrangements made up only 12% of all electric vehicle sales in the U.S. in 2022. While the EV credit will help this market recover, it will need more favorable economic circumstances to enhance its potential use.”

ACEA remains unhappy with the North American assembly requirement for purchased vehicles, which the trade group considers “discriminatory and counterproductive in terms of reaching the EV sales target set by the U.S. government.” 

Despite this, the U.S. remains a key market for Europe’s automakers with 20% of the bloc’s €12.3 billion ($13.4 billion) EV exports heading to the U.S. in 2021. And EU auto exports to the U.S. are growing. According to Statista, in 2021 light-vehicle exports to the U.S. generated €25.5 billion ($27.3 billion) in receipts, up 9% on 2020. 

The Volkswagen Group of America tells Wards it “expects the IRA and ZEV (zero-emission-vehicles) mandates in several U.S. states to further bolster demand for electric vehicles over the next years,” although it expects to meet much of that demand from U.S. and Mexico-based VW plants.  

The Japanese government and automakers had also been campaigning for the U.S. to relax its rules on imported EVs’ tax-credit eligibility, so applying the regulations to leased EVs is a concession. Japanese automotive exports to the U.S. are also significant. In 2021, Japanese manufacturers exported approximately 1.33 million motor vehicles to the U.S., says Statista, with the Observatory of Economic Complexity saying the 2020 value of Japanese auto exports to the U.S. was $32.8 billion. 

As with many European manufacturers, however, many Japanese auto companies have long benefited from locating plants in North America and so were already eligible for the tax credit, says Koji Endo, an auto sector analyst with Tokyo-based SBI Securities. “This makes sense not just because of the IRA provisions, but to keep transportation costs down, to limit taxes and other non-tariff barriers,” he says.

In the US, this lease liberalization has not met universal approval. Sen. Joe Manchin, D-WV, chair of the Senate Committee on Energy and Natural Resources, warned that it might let foreign-owned automakers “focus their attention away from trying to invest in North America.” 

Commenting on the drip feed of implementing rules for the IRA tax credit, John Bozzella, president and CEO of Alliance for Automotive Innovation, says the full impact of the IRA and what vehicles qualify will not be known before March, when rules covering critical minerals and battery-components qualifications will emerge. 

“That’s why I think it’s going to be bumpy until every manufacturer is at least operating under the same basic ground rules and the raw material and battery requirements catch up to the current geopolitical, sourcing and mineral extraction realities.” 

– with Julian Ryall in Tokyo and Keith Nuthall in Ottawa