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Info Service on Finance and Development (Apr24/01) Penang, 29 Mar (Kanaga Raja) — China has initiated a dispute at the World Trade Organization over certain tax credits provided by the United States under the US Inflation Reduction Act (IRA) for the production of electric vehicles and renewable energy projects. As an initial step, China has requested consultations with the US. The request was circulated to WTO members on 28 March. If consultations fail to settle the dispute within 60 days, or if during the 60 days, the consulting parties jointly consider that the consultations have failed, the complaining party may request the establishment of a panel. In its communication (WT/DS623/1) to the Dispute Settlement Body (DSB), China said that its request for consultations is with respect to certain subsidy measures adopted by the United States that are contingent upon the use of domestic over imported goods or that otherwise discriminate against goods of Chinese origin. According to the communication from China, on 16 August 2022, the Inflation Reduction Act, P. L. 117-169, 136 Stat. 1818 (“IRA”) was signed into law. The IRA may be the largest single subsidy measure in modern economic history, said China. Official estimates of the climate-related subsidies provided under the IRA place their value at $393 billion. Other independent studies have estimated that the value of these subsidies exceeds $1 trillion, it added. While the subsidies provided under the IRA are massive and far-reaching in their economic effects, China said that its request for consultations concerns only certain subsidies provided under the IRA that are contingent, in one way or another, upon the use of domestic over imported goods or that otherwise discriminate against goods of Chinese origin. It said these are: (1) the Clean Vehicle Credit; (2) the Investment Tax Credit for Energy Property; (3) the Clean Electricity Investment Tax Credit; (4) the Production Tax Credit for Electricity from Renewables; and (5) the Clean Electricity Production Tax Credit. China said that it strongly supports national and international efforts to reduce and mitigate the effects of climate change, including through the use of clean energy subsidies provided in accordance with the WTO Agreement. “International trade in clean energy products, including the inputs to those products, can accelerate and reduce the costs of the clean energy transition when undertaken in accordance with the WTO Agreement,” it added. Non-prohibited, non-discriminatory subsidies have a role to play in this transition, China underlined. However, it said that subsidies that violate the WTO Agreement, including subsidies that are contingent upon the use of domestic over imported goods or that otherwise discriminate against imported goods, remain prohibited and threaten to undermine international cooperation on reducing and mitigating the effects of climate change. According to the Chinese communication, the subsidies at issue in its request for consultations are of this type. China said that they are discriminatory, protectionist, and contrary to WTO rules. “They do nothing to advance the shared interest that all Members have in addressing climate change and are to be condemned.” On the Clean Vehicle Credit, China noted that Section 13401 of the IRA establishes the Clean Vehicle Credit for qualifying electric vehicles (“EVs”). It said to qualify for the Clean Vehicle Credit, final assembly of the qualifying vehicle must take place in North America. The North American assembly requirement is a condition for obtaining either or both of the two components of the Clean Vehicle Credit: (1) the critical minerals component, worth $3,750 per vehicle; and (2) the battery component, worth an additional $3,750 per vehicle. China said to qualify for the $3,750 critical minerals component of the Clean Vehicle Credit, a percentage of the value of applicable critical minerals contained in the vehicle battery must (i) be extracted or processed in the United States; (ii) be extracted or processed in a country with which the United States has a free trade agreement; or (iii) have been recycled in North America. It said applicable percentages increase from 40 percent prior to 2024 to 80 percent after 2026. Qualifying critical minerals include, inter alia, aluminium, cobalt, lithium, nickel, and graphite. In addition, the Chinese communication said after calendar year 2024, a clean vehicle will not qualify for the critical minerals component of the Clean Vehicle Credit if it contains any critical minerals that were “extracted, processed, or recycled by a foreign entity of concern”. According to China, a “foreign entity of concern”, or “FEOC”, is defined to include, inter alia, a foreign entity that is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation …”. A “covered nation” includes the People’s Republic of China. To qualify for the $3,750 battery component of the Clean Vehicle Credit, a certain percentage of the value of the battery components in an EV must be manufactured or assembled in North America. Applicable percentages increase from 50 percent prior to 2024 to 100 percent after 2028, said China. In addition, it said that after 31 December 2023, a vehicle does not qualify for the battery component of the credit if any “components” contained in its battery are “manufactured or assembled by a foreign entity of concern” as specified above. On the Renewable Energy Tax Credits, China said the IRA extends and modifies certain pre-existing investment tax credits (“ITCs”) and production tax credits (“PTCs”) for renewable energy projects. The ITCs provide tax subsidies for investments in eligible renewable energy projects while the PTCs provide tax subsidies for power generated from eligible renewable energy sources. China said the modified ITC and PTC tax credits include bonus subsidy elements that are contingent upon the use of domestic over imported goods. The Chinese communication also said that the IRA has two related investment tax credits for renewable energy projects. The first, the Investment Tax Credit for Energy Property, is codified at 26 U.S.C. 48 and is available for eligible renewable energy projects for which construction begins prior to 1 January 2025. China said that the second investment tax credit available under the IRA, the Clean Electricity Investment Tax Credit, is codified at 26 U.S.C. 48E and is available for eligible renewable energy projects placed in service after 31 December 2024. The base tax credit under both programmes is six percent of the qualified investment in the energy property, it added. China said that the IRA also has two related production tax credits for energy produced from eligible renewable energy sources. The first, the Production Tax Credit for Electricity from Renewables, is codified at 26 U.S.C. 45 and is available over a 10-year period for energy produced from projects that begin construction prior to 1 January 2025. The second, the Clean Electricity Production Tax Credit, is codified at 26 U.S.C. 45Y and is available over a 10- year period for energy produced from projects placed in service after 31 December 2024. According to China, the base credit available under both programmes is $0.03/kW, inflation adjusted. The two ITC programmes and the two PTC programmes (hereinafter referred to collectively as the “Renewable Energy Tax Credits”) contain bonus subsidy elements that are contingent upon the use of domestic over imported goods, it said. It said for the ITC programmes, the amount of the tax credit is increased by 10 percentage points if the domestic content requirements are satisfied, while for the PTC programmes, the amount of the tax credit is increased by 10 percent if the domestic content requirements are satisfied. The domestic content requirements for the four Renewable Energy Tax Credits are the same, China noted. Specifically, China said that the eligible project must use 100 percent domestic steel and iron for construction materials (the “Steel and Iron Requirement”). In addition, a certain percentage of the components incorporated into an eligible project must be produced in the United States (the “Manufactured Products Requirement”). The percentage of incorporated components that must be produced in the United States varies over time and also in relation to the type of renewable energy project, China said. In summary, the Chinese communication identified the measures at issue as follows: * The Inflation Reduction Act, P. L. 117-169, 136 Stat. 1818; * Internal Revenue Service, Section 30D New Clean Vehicle Credit, Proposed Rule, 88 FR 23370 (17 April 2023); * Internal Revenue Service, Section 30D Excluded Entities, Proposed Rule, 88 FR 84098 (4 December 2023); * Department of Energy, Interpretation of Foreign Entity of Concern, Proposed Rule, 88 FR 84082 (4 December 2023); * Internal Revenue Service, Definition of Energy Property and Rules Applicable to the Energy Credit, 88 FR 82188 (22 November 2023); * Internal Revenue Service, Domestic Content Bonus Credit Guidance under Sections 45, 45Y, 48, and 48E (12 May 2023) (Notice 2023-38). China said it is concerned that the measures described above are inconsistent with the United States’ obligations under multiple provisions of the covered agreements. China considers that the Clean Vehicle Credit is inconsistent with the following provisions of the covered agreements: * Article I:1 of the GATT 1994, because by conditioning eligibility for the Clean Vehicle Credit on the North American assembly requirement, the critical minerals requirement, and the battery requirement (whether these three requirements are viewed separately or in any combination), and also by restricting eligibility for the Clean Vehicle Credit in the case of vehicles incorporating critical minerals and battery components produced by so- called “foreign entities of concern”, the United States does not accord to products of Chinese origin immediately and unconditionally the same advantages, favours, privileges, or immunities in respect of matters referred to in paragraph III:4 of the GATT 1994 that the United States accords to like products originating in the territory of other countries. * Article III:4 of the GATT 1994, because by conditioning eligibility for the Clean Vehicle Credit on the North American assembly requirement, the critical minerals requirement, and the battery requirement (whether these three requirements are viewed separately or in any combination), and also by restricting eligibility for the Clean Vehicle Credit in the case of vehicles incorporating critical minerals and battery components produced by so-called “foreign entities of concern”, the United States does not accord to products of Chinese origin treatment no less favourable than the treatment accorded to like products of national origin in respect of laws, regulations, and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of the affected products. * Article 2.1 of the TRIMs Agreement, because the measures at issue appear to be investment measures related to trade in goods that are inconsistent with Article III:4 of the GATT 1994. * Article 2.2 of the TRIMs Agreement, because the measures at issue appear to be investment measures related to trade in goods, compliance with which is necessary to obtain an advantage, and which require the purchase or use by an enterprise of products of US origin or from any US source, as provided for in paragraph 1(a) of the Annex to the TRIMs Agreement. * Articles 3.1(b) and 3.2 of the SCM Agreement, because the Clean Vehicle Credit is a subsidy contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods. China considers that the Renewable Energy Tax Credits are inconsistent with the following provisions of the covered agreements: * Article III:4 of the GATT 1994, because by conditioning eligibility for bonus subsidy amounts on the use of US-origin goods, the United States does not accord to products of Chinese origin treatment no less favourable than the treatment accorded to like products of national origin in respect of laws, regulations, and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of the affected products. * Article 2.1 of the TRIMs Agreement, because the measures at issue appear to be investment measures related to trade in goods that are inconsistent with Article III:4 of the GATT 1994. * Article 2.2 of the TRIMs Agreement, because the measures at issue appear to be investment measures related to trade in goods, compliance with which is necessary to obtain an advantage, and which require the purchase or use by an enterprise of products of US origin or from any US source, as provided for in paragraph 1(a) of the Annex to the TRIMs Agreement. * Articles 3.1(b) and 3.2 of the SCM Agreement, because the bonus subsidy amounts available for the Renewable Energy Tax Credits are subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods. China said in addition, and as a consequence of the foregoing, the measures at issue appear to nullify or impair benefits accruing to China, directly or indirectly, under the cited agreements. +
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