As in prior years, more than half of the APAs executed in 2022 involved transactions between non-U.S. parents and U.S. subsidiaries.

Most of the transactions¹⁰ covered in APAs executed in 2022 involve the sale of tangible goods or the provision of services. Twenty-two percent of the transactions involve the use of intangible property, which can be among the most challenging transactions in APMA’s inventory.

In the majority of APAs, the covered transactions involve numerous business functions and risks. For instance, with respect to functions, APAs involving manufactured products typically involve a controlled group that conducts research and development (R&D), engages in product design and engineering, manufactures the product, markets and distributes the product, and performs support functions such as legal, finance, and human resources. Regarding risks, the controlled group may assume a variety of risks, including market risks, R&D risks, financial risks, credit and collection risks, product liability risks, and general business risks. In the APA evaluation process, a significant amount of time and effort is devoted to understanding how the functions and risks are allocated among the controlled group of companies that are party to the covered transactions. For methods requiring the selection of a tested party, the tested party chosen generally will be the least complex of the controlled taxpayers.

Consistent with prior years, a majority of tested parties¹¹ in 2022 were U.S. distributors, U.S. manufacturers, or U.S. service providers.

In 2022, the most commonly used transfer pricing method (TPM) for both the sale of tangible property and the use of intangible property continued to be the comparable profits method/transactional net margin method (CPM/TNMM). The CPM/TNMM was used for 77 percent of these types of transactions.

For covered transactions involving tangible and intangible property that used the CPM/TNMM, the operating margin (OM) is still the most common profit level indicator (PLI) used to benchmark results. It was used 73 percent of the time. Other PLIs, such as the Berry Ratio and return on total cost, made up the other 27 percent. As used here, “OM” is defined as the ratio of operating profit to sales,¹² and “Berry Ratio” is defined as the ratio of gross profit to operating expenses.¹³ Most services transactions (80 percent) also used the CPM/TNMM with the OM and operating profit to operating expense being the most common PLIs (used 53 percent of the time).¹⁴

For the APAs executed in 2022 that involved the CPM/TNMM with a North American tested party, the most widely used data source for comparables was Standard and Poor’s Compustat/Capital IQ database. Different sources were used in other cases (e.g., where the tested party was not a U.S. or Canadian entity or where transaction-based methods were applied). The other most commonly used databases are listed in the table below.

In making comparability adjustments, typical balance sheet adjustments, as identified in Treas. Reg. §§ 1.482-1(d)(2) and 1.482-5(c)(2)(iv), were made in most cases, including where appropriate, adjustments for payables, receivables, inventory, and fixed assets. In addition, where appropriate, adjustments for different accounting practices were made to convert from LIFO to FIFO inventory accounting, and a small number of cases involved the accounting reclassification of expenses, e.g., from COGS to operating expenses.

Most transactions covered in APAs target an interquartile range or point within the interquartile range as described in Treas. Reg. § 1.482-1(e)(2)(iii)(C), and other targeted arm’s length ranges. Where the transaction involves a royalty payment for the use of intangible property, both specific royalty rates and ranges have been used. Where the covered transaction is the sale or license of intangible property, and the payment for such transfer would be a royalty based solely on external comparable uncontrolled transactions, a secondary or confirming method, e.g., a test of the post-royalty operating margin or cost-plus mark-up, has sometimes also been used. The testing periods of the APAs executed in 2022 were either a single year, the term of the APA only, or the term of the APA plus rollback years.

APAs executed in 2022 included several mechanisms for making adjustments to the tested party’s results when the results fall outside the interquartile range or do not match the point required by the APA. Examples of the mechanisms used include an adjustment bringing the tested party’s results for a single year to either the closer edge of the range or the median of the range, an adjustment to bring the results over the APA term to the closer edge of the range, or an adjustment to bring the results to a specified point or royalty rate.

The model APAs used by the IRS (included as Appendix 1 and Appendix 2 of this report) include standard critical assumptions that there will be no material changes to the taxpayer’s business or to its tax or financial accounting practices during the APA term. A few bilateral cases have also included critical assumptions tied to the taxpayer’s profitability in a certain year or over the term of the APA. Pursuant to § 7.06(3) of Rev. Proc. 2015-41, APMA will cancel an APA in the event of a failure of a critical assumption unless the parties agree to revise the APA.

As described in § 3.03(1) of Rev. Proc. 2015-41, taxpayers should request an APA term that will cover at least five prospective years and may also request that the APA be “rolled back” to cover one or more earlier taxable years, although the appropriate APA term is decided on a case-by-case basis. Of the APAs executed in 2022, 16 percent included rollback years. A substantial number of those APAs with terms of greater than five years were submitted as a request for a five-year term, and the additional years were agreed to between the taxpayer and the IRS (or, in the case of a bilateral APA, between the IRS and the foreign government upon the taxpayer’s request) to ensure a reasonable amount of prospectivity in the APA term.

Median completion time continued to rise in 2022 to 43.4 months (from 35.1 months in 2021and 32.7 months in 2020).

As described in § 7.02(1) of Rev. Proc. 2015-41, taxpayers are required to file annual reports to demonstrate compliance with the terms and conditions of their APAs. The filing and review of these annual reports are critical parts of the APA process. Through annual report review, the APMA Program monitors taxpayer compliance with APAs on a contemporaneous basis. Annual report review also provides current information on the success or problems associated with the various TPMs adopted in the APA process.

APAs require taxpayers to file timely and complete annual reports describing their operations and demonstrating compliance with the APA’s terms and conditions. Not every annual report will include each of the items listed in the following table; they are required where the facts demonstrate a need for such documentation. The requirements for the information to be included in a specific APA annual report is included in Appendix C of the executed APA.

In appropriate cases, APAs may provide specific approaches for dealing with risks, including currency risk, such as adjustment mechanisms and/or critical assumptions.

The Parties to this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Insert Taxpayer’s Name], EIN ________.

[Insert Taxpayer Name] is the common parent of an affiliated group filing consolidated U.S. tax returns (collectively referred to as “Taxpayer”) and is entering into this APA on behalf of itself and other members of its consolidated group.

Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties].

This APA contains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Transactions under I.R.C. section 482, the Treasury Regulations thereunder, and any applicable tax treaties.

{If renewal, add} [Taxpayer and IRS previously entered into an APA covering taxable years ending _____ to ______, executed on ________.]

The Parties agree as follows:

WITNESS,

The Parties have executed this APA on the dates below.

[Taxpayer Name in all caps]

By: ___________________________ Date: ___________________, 201___

Jane Doe

Sr. Vice President (Taxes)

IRS

By: ___________________________ Date: ___________________, 201___

John M. Wall

Acting Director, Advance Pricing and Mutual Agreement Program

1. Covered Transactions.

[Define the Covered Transactions.]

2. APA Term.

This APA applies to Taxpayer’s taxable years ending __________ through ________ (APA Term).

3. TPM.

{Note: If appropriate, adapt language from the following examples.}

[The Tested Party is __________.]

•CUP Method

The TPM is the comparable uncontrolled price (CUP) method. The Arm’s Length Range of the price charged for _________ is between _______ and ___________ per unit.

•CUP Method

The TPM is the CUT Method. The Arm’s Length Range of the royalty charged for the license of ______is between ____% and ___ % of [Taxpayer’s, Foreign Participants’, or other specified party’s] Net Sales Revenue. [Insert definition of net sales revenue or other royalty base.]

•Resale Price Method (RPM)

The TPM is the resale price method (RPM). The Tested Party’s Gross Margin for any APA Year is defined as follows: the Tested Party’s gross profit divided by its sales revenue (as those terms are defined in Treasury Regulations sections 1.482-5(d)(1) and (2)) for that APA Year. The Arm’s Length Range is between ____% and ___ %, and the Median of the Arm’s Length Range is ___%.

•Cost Plus Method

The TPM is the cost plus method. The Tested Party’s Cost Plus Markup is defined as follows for any APA Year: the Tested Party’s ratio of gross profit to production costs (as those terms are defined in Treasury Regulations sections 1.482-3(d)(1) and (2)) for that APA Year. The Arm’s Length Range is between ___% and ___%, and the Median of the Arm’s Length Range is ___%.

•CPM with Berry Ratio PLI

The TPM is the comparable profits method (CPM). The profit level indicator is a Berry Ratio. The Tested Party’s Berry Ratio is defined as follows for any APA Year: the Tested Party’s gross profit divided by its operating expenses (as those terms are defined in Treasury Regulations sections 1.482-5(d)(2) and (3)) for that APA Year. The Arm’s Length Range is between ____ and ___, and the Median of the Arm’s Length Range is ___.

•CPM using an Operating Margin PLI

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s Operating Margin is defined as follows for any APA Year: the Tested Party’s operating profit divided by its sales revenue (as those terms are defined in Treasury Regulations section 1.482-5(d)(1) and (4)) for that APA Year. The Arm’s Length Range is between ____% and ___ %, and the Median of the Arm’s Length Range is ___%.

•CPM using a Three-year Rolling Average Operating Margin PLI

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. The Tested Party’s Three-Year Rolling Average operating margin is defined as follows for any APA Year: the sum of the Tested Party’s operating profit (within the meaning of Treasury Regulation section 1.482-5(d)(4) for that APA Year and the two preceding years, divided by the sum of its sales revenue (within the meaning of Treasury Regulation section 1.482-5(d)(1)) for that APA Year and the two preceding years. The Arm’s Length Range is between ____% and ____%, and the Median of the Arm’s Length Range is ___%.

•Residual Profit Split Method

The TPM is the residual profit split method. [Insert description of routine profit level determinations and residual profit-split mechanism].

[Insert additional provisions as needed.]

4. Application of TPM.

For any APA Year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate for the Covered Transactions] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the Tested Party] within the Arm’s Length Range, then the amounts reported on Taxpayer’s U.S. Return must clearly reflect such results.

For any APA year, if the results of Taxpayer’s actual transactions produce a [price per unit, royalty rate] [or] [Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin for the Tested Party] outside the Arm’s Length Range, then amounts reported on Taxpayer’s U.S. Return must clearly reflect an adjustment that brings the [price per unit, royalty rate] [or] [Tested Party’s Gross Margin, Cost Plus Markup, Berry Ratio, Operating Margin, Three-Year Rolling Average Operating Margin] to the Median.

For purposes of this Appendix A, the “results of Taxpayer’s actual transactions” means the results reflected in Taxpayer’s and Tested Party’s books and records as computed under U.S. GAAP [insert another relevant accounting standard if applicable], with the following adjustments:

(a) [The fair value of stock-based compensation as disclosed in the Tested Party’s audited financial statements shall be treated as an operating expense]; and

(b) To the extent that the results in any prior APA Year are relevant (for example, to compute a multi-year average), such results shall be adjusted to reflect the amount of any adjustment made for that prior APA Year under this Appendix A.

5. APA Revenue Procedure Treatment

If Taxpayer makes an adjustment under paragraph 4 of this Appendix A (a “primary adjustment”), Taxpayer and its related foreign entity may elect APA Revenue Procedure Treatment in accordance with section 11.02(3) of Revenue Procedure 2006-9 and avoid the possible adverse tax consequences of a secondary adjustment that would otherwise follow the primary adjustment.

[Insert additional provisions as needed.]

This APA’s critical assumptions are:

1. The business activities, functions performed, risks assumed, assets employed, and financial and tax accounting methods and classifications [and methods of estimation] of Taxpayer in relation to the Covered Transactions will remain materially the same as described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.

[Insert additional provisions as needed.]

APA RECORDS

The APA Records will consist of all documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records, or other writings that support the information provided in such documents.

ANNUAL REPORT

The Annual Report (and each of the four copies required by paragraph 5(e) of this APA) will include:

The following definitions control for all purposes of this APA. The definitions appear alphabetically below:

The APA Annual Report Summary on the next page is a required APA Record. The APA Team Leader supplies some of the information requested on the form. Taxpayer is to supply the remaining information requested by the form and submit the form as part of its Annual Report.

UNDER REVENUE PROCEDURE 2015-41

_______________

The Advance Pricing and Mutual Agreement Program (“APMA”) of the Internal Revenue Service (“IRS”) is providing this template for use in drafting advance pricing agreements (“APAs”) issued under IRS Revenue Procedure 2015-41, 2015-35 I.R.B. 263 (“Rev. Proc. 2015-41”). This template is designed to systematize how taxpayers propose terms for their APAs and standardize language used in executed APAs. It will improve efficiency in the APA process and enhance consistency in the administration of the APA program.

Rev. Proc. 2015-41 requires that taxpayers include as part of a complete APA request a draft APA and a “redline” comparison of the proposed draft APA against the current model APA. See section 2.03, exhibit 15, of the Appendix to Rev. Proc. 2015-41. This template serves as the model APA. A taxpayer is required to produce the “redline” comparison by following the instructions below to edit this template with tracked changes. The draft APA and “redline” comparison are then to be included in Word format in the complete APA request. (Before editing the template with tracked changes, a taxpayer should remove this introduction and the instructions below from the Microsoft Word file.)

The assigned APMA team will review the APA’s terms proposed in the draft APA. If the APMA team accepts the proposed terms in light of its review of the taxpayer’s complete APA request and other information obtained during the APA process, then the text of the draft APA, edited as needed to fill in any information not available at the time of the APA Request, will be adopted as the text of a finally executed APA. If the APMA team does not accept the proposed terms, it will discuss modifications to the draft APA with the taxpayer during the APA process. For bilateral and multilateral APAs, the terms of the executed APA will of necessity be consistent with the terms of the underlying mutual agreement between the United States and one or more treaty partners.

The template is designed to minimize editing by using an options-based format for selecting from terms presented in certain sections of the model APA. The options presented are those which APMA considers standard and which it has accepted in final APAs. These options are not binding on APMA, however. APMA reserves the right to modify the option selections, the specific option language used, or any other terms before executing an APA with the taxpayer.

Options are indicated by square brackets (“[]”). An “x” should be inserted between the brackets to indicate the selected option (“[x]”). Options that are not selected should not be deleted, but instead should be left in the text of the draft APA. The options to which APMA and the taxpayer ultimately agree for the final APA will be indicated by the presence or absence of an “x”. The term associated with the “x” will be given operative effect in the executed APA.

Certain options are flagged with an asterisk after the square brackets (“[]*”). To facilitate the APMA team’s subsequent review of the draft APA, the asterisks should not be deleted. Taxpayers that select flagged options are required to specifically provide justification for the selection in the APA request. See section 1.02, Part 5, of the Appendix to Rev. Proc. 2015-41.

The template contains placeholder phrases consisting of a hashtag followed by one or more words in block capital letters (e.g., “#COUNTRY”). Generally, the taxpayer should replace a placeholder phrase with appropriate text, subject to the following conventions:

The APA Term will be expressed as dates certain, e.g., “January 1, 2017 to December 31, 2022, inclusive”, rather than as particular tax years.

Taxpayers may need to draft custom text for situations or options not included in the template. For example, a taxpayer may propose additional critical assumptions to address specific regulatory contingencies or conditions the taxpayer is expected to face during the term of the APA. As another example, the provision titled “Limitation on Assistance” at the end of the Recitals might be modified based on an understanding reached in the prefiling stage of the APA process. In some cases, a particular critical assumption might facilitate reaching an agreement on an APA. Taxpayers that include custom text are required to specifically provide justification for the inclusion in the APA request, just as selecting an option with an asterisk requires justification. Any custom text must also be evident in the “redline” comparison of the proposed draft APA.

The template contains certain tables that the taxpayer should edit. Entries in the tables will not contain hashtags, but taxpayers nevertheless should fill in the information and add additional rows to the tables if needed. Taxpayers also should fill in the “APA Information” in the table in Appendix D, to the extent available or proposed.

Appendix A of this template contains the description of the APA’s covered issue(s) and covered method(s). Taxpayers should note the following points in completing Appendix A:

Appendix A uses the term “Tested Party.” When applied in the context of methods that consider, or test, data from only one party to a transaction, this term is similar in concept to the term “tested party” as discussed in the OECD Guidelines at paragraphs 3.18 and 3.19, and as defined in the U.S. Treasury Regulations section 1.482-5(b)(2). However, some methods consider, or test, data from both parties to a transaction, where there is no singular “tested” party. Even in applying such methods, however, it is typically the case that one particular party’s results are formally tested for compliance with the method. For purposes of this template, in such circumstances, the party whose results are formally tested in applying any particular method is the “Tested Party”, even if that party is not strictly a “tested party” as discussed in the OECD Guidelines paragraphs 3.18 and 3.19, or as defined in the U.S. Treasury Regulations section 1.482-5(b)(2).

The Parties to this APA are the Internal Revenue Service (“IRS”) and #NAME OF EACH NON-IRS SIGNATORY, WITH EIN.

[] #SIGNATORY will be referred to as “U.S. Taxpayer.”

[] #SIGNATORY is the common parent of an affiliated group filing consolidated U.S. tax returns and is entering into this APA on behalf of both itself and the following members of its consolidated group: #MEMBERS OF GROUP. All members of this consolidated group will be referred to collectively as “U.S. Taxpayer.”

[] This APA is a renewal of one or more prior APAs, which are listed below in reverse chronological order:

Key:

[] This is a bilateral APA within the meaning of Rev. Proc. 2015-41 and implements the terms of a mutual agreement reached between the United States and #COUNTRY.

[] This is a multilateral APA within the meaning of Rev. Proc. 2015-41 and implements the terms of a mutual agreement reached among the United States, #COUNTRIES.

[] This APA is a unilateral APA within the meaning of Rev. Proc. 2015-41 and is not based on any mutual agreement.

The Parties to this APA are defined in the ”Parties” section above. Regarding the Party(ies) to this APA other than the IRS:

[] No such Party has an immediate parent or owner that is not a U.S. entity.

[] One or more such Parties has an immediate parent or owner that is not a U.S. entity, as follows:

Key:

The term “Worldwide Group” is defined below in paragraph 12 of this APA. The ultimate parent entity or owner of Worldwide Group is:

#ENTITY NAME, ADDRESS, AND PHONE

U.S. Taxpayer’s principal place of business is #CITY, #STATE. #BRIEF DESCRIPTION OF U.S. TAXPAYER AND NON-U.S. TAXPAYER (DEFINED IN SECTION 1 OF APPENDIX A), AND SPECIFICALLY OF EACH COVERED ENTITY (DEFINED IN SECTION 1 OF APPENDIX A).

This APA contains the Parties’ agreement on the Covered Method(s) for resolving the Covered Issue(s) under Code section 482 and any other Code sections that are identified in Appendix A to this APA, the U.S. Treasury Regulations thereunder, and (if applicable):

[] The income tax convention(s) between the United States and #COUNTRY(IES).

This APA shall not limit the authority of the IRS to (1) verify compliance with this APA as to the Covered Issue(s), or (2) audit issues other than Covered Issue(s), including issues that arise under Code section 482 and any other Code sections identified in Appendix A to this APA, and the U.S. Treasury Regulations thereunder.

The Covered Issue(s) may relate to one or more countries which (i) have an income tax convention with the United States, but (ii) are not a party to a mutual agreement whose terms are implemented by this APA. U.S. Taxpayer acknowledges that the IRS may decline to provide competent authority assistance concerning taxation by such country(ies) that relates to the Covered Issue(s). See section 2.02(4)(d) of Rev. Proc. 2015-41.

The Parties agree as follows:

WITNESS,

The Parties have executed this APA on the dates below.

#SIGNATORY NAME IN BOLD FACE BLOCK CAPITAL LETTERS

By: __________________________Date: _________________, 20____

#NAME

#TITLE

INTERNAL REVENUE SERVICE

By: __________________________Date: _________________, 20____

John M. Wall

Acting Director, Advance Pricing and Mutual Agreement Program

The APA Records will consist of all documents listed below for inclusion in the Annual Report, as well as all documents, notes, work papers, records, or other writings that support the information provided in such documents.

An Annual Report must be submitted for each APA Tax Year in accordance with paragraph 6(e) of the APA and section 7.02 of Rev. Proc. 2015-41.

For each APA Tax Year, the Annual Report (and each copy or version as required by paragraph 6(e) of the APA) will include:

1. Two copies of a properly completed APA Annual Report Summary in the form of Appendix D to this APA, one copy of the form bound with, and one copy provided separately from, the rest of the Annual Report. (The electronic version of the Annual Report need have only one copy of this item.)

2. A table of contents organized according to the additional required items listed below.

3. For such APA Tax Year and the corresponding APA Covered Year, statements that fully identify, describe, analyze, and explain:

a. All material differences between the Covered Entities’ business activities, functions performed, risks assumed, assets employed, contractual terms, markets, and economic conditions faced in relation to the Covered Issues during such APA Covered Year from those same items described in the APA Request. If there have been no such material differences, the Annual Report will include a statement to that effect.

b. All material differences between Covered Entities’ financial accounting methods and classifications and methods of estimation in relation to the Covered Issues and Covered Methods used during such APA Covered Year, from those described or used in the APA Request. If any change was made to conform to changes in the Applicable Accounting Standard, U.S. Taxpayer will specifically identify the change. If there have been no such material differences, the Annual Report will include a statement to that effect.

c. Regarding notices under paragraph 16 of the APA:

i. A current statement of how the IRS should provide such notices to U.S. Taxpayer (and, if applicable, to U.S. Taxpayer’s representative).

ii. A copy of any such notices that were submitted by U.S. Taxpayer to the IRS after the last Annual Report was submitted (or, if there was no prior Annual Report, after the APA was executed). If there were no such notices, the Annual Report will include a statement to that effect.

d. Any failure of any Critical Assumption. If there has been no such failure, the Annual Report will include a statement to that effect.

e. Whether or not material information submitted while the APA Request was pending is discovered to be false, incorrect, or incomplete, and if so a correction or completion of that information, as applicable.

f. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be disregarded for federal income tax purposes) of any Worldwide Group member that is a Covered Entity or is otherwise relevant to the Covered Issue(s) or Covered Method(s).

g. The following regarding any APA Primary Adjustments made for such APA Tax Year under Appendix A to this APA:

i. The amounts of any APA Primary Adjustments;

ii. The circumstances that led to such APA Primary Adjustments being necessary;

iii. A calculation of the net APA Primary Adjustment as defined in Appendix A to this APA; and

iv. A complete description of the means by which the conforming adjustment (see section 6 of Appendix A to this APA) is accomplished, including:

A. a description of any accounts payable established, including the entities involved and when the payables are established;

B. a description of any amounts paid or deemed paid (including amounts paid or deemed paid in satisfaction of an intercompany payable established as described in section 6 of Appendix A to this APA, and including any deemed reverse payments as described in section 6 of Appendix A to this APA), that specifies the entities involved, when the amounts are paid or deemed paid, and by what means any amounts are actually paid; and

C. the character (such as capital, ordinary, income, expense, dividend, contribution to capital) and country source of any payments and deemed payments, and the specific affected line item(s) of any affected U.S. return;

h. A detailed numerical explanation of how the result of the application of the Covered Methods is reflected on the U.S. return, with reference to particular line items on the U.S. return. This explanation shall include the amounts, description, reason for, and financial analysis of any book-tax differences, as reflected on Schedule M-1 or Schedule M-3 of the U.S. return for such APA Tax Year, that (i) are relevant to an APA Primary Adjustment, (ii) otherwise are relevant to the book and tax treatment of any income or expense item that is part of the Relevant Financial Data for, or is determined by, any Covered Method for such APA Tax Year, or (iii) otherwise are relevant to the APA. U.S. Taxpayer shall not simply attach a copy of the pertinent schedule. Rather, U.S. Taxpayer shall specifically identify the relevant items from that schedule and shall describe in appropriate detail the nature of those items, how they arose, and how they are accounted for.

i. Whether or not U.S. Taxpayer contemplates requesting, or has requested, to renew, modify, or cancel the APA.

4. The Financial Statements and additional statements required under paragraph 6(f) of the APA, for such APA Tax Year and for any other tax year whose financial data are relevant to compliance with the APA for such APA Tax Year;

5. A financial analysis that includes U.S. Taxpayer’s calculations to apply the Covered Method(s) to the Covered Issue(s) for such APA Covered Year and supports those calculations with additional material that ties those calculations to the Financial Statements. The intent of this requirement is that the analysis submitted should provide a clear, complete, detailed, and self-contained means by which the IRS can verify compliance with the Covered Method(s). This requirement is further explained as follows:

a. The additional material must support every numerical input to U.S. Taxpayer’s calculations.

b. The additional material could include, for example, consolidating financial statements, segmented financial data, and records from the general ledger.

c. Where segmented data are used, U.S. Taxpayer must specify in detail how it accomplished the segmentation, including how it made allocations and apportionments, including (i) the definition and calculation of any apportionment keys used, and (ii) the calculations applying such keys. The inputs used for those various calculations must be tied to the Financial Statements.

d. The additional material must be annotated sufficiently to let the IRS easily trace U.S. Taxpayer’s entire calculations to objective, verifiable sources of data.

e. Where needed for clarity, terms must be defined.

6. The financial results pertinent to the Covered Method(s), for such APA Covered Year and all prior years, entered along with data concerning the Covered Method(s) in an electronic results template available by contacting APMA.

7. [] An organizational chart for Worldwide Group, revised annually to reflect all ownership or structural changes of the Covered Entities and any other entities that are relevant to the Covered Issue(s) or are otherwise relevant to the Covered Method(s).

[]* An organizational chart for a part of Worldwide Group that includes all Covered Entities and includes any other entities relevant to the Covered Issue(s) or Covered Method(s), revised annually to reflect all ownership or structural changes of entities that are involved in the Covered Issue(s) or are otherwise relevant to the Covered Issue(s) or Covered Method(s).

8. A valid IRS Form 2848 “Power of Attorney and Declaration of Representative” for any representative to receive notices under paragraph 16 of this APA.

9. A copy of the APA and any amendment.

10. A penalty of perjury statement, executed in accordance with Rev. Proc. 2015-41, sections 7.02(8) and (9).

The APA Annual Report Summary on the next page is a required APA Record. APMA supplies some of the information requested on the form. U.S. Taxpayer is to supply the remaining information requested by the form and submit the form as part of its Annual Report.

Date Annual Report Filed (to be filled in by APMA):

¹ 2017, Transfer Pricing Operations became Treaty & Transfer Pricing Operations (“TTPO”).

² In late 2020, TTPO’s Treaty Assistance and Interpretation Team (TAIT) joined APMA, bringing the total number of groups in APMA to four. The three legacy APMA groups have primary responsibility for cases arising under the business profits and associated enterprises articles of U.S. tax treaties. TAIT endeavors to resolve competent authority issues arising under all other articles of U.S. tax treaties including issues arising under U.S. tax treaties relating to estate and gift taxes. As such, TAIT is separate from APMA’s APA program, and the total numbers of team leaders and managers handling APA cases do not include TAIT analysts and managers.

³ The first APA Statutory Report, which compiled APA data from 1991-1999, did not report the cumulative number of applications for those years by submission type, so the cumulative totals cannot be reported in that manner.

⁴ “Executed APAs” refers to APAs that were finalized and includes both initial and renewal APAs.

⁵ The number of renewals executed is included in the total number of APAs executed during the year.

⁶ The number of renewals still pending as of year-end is also included in the total number of pending APAs.

⁷ The first APA Statutory Report, which compiled APA data from 1991-1999, and the second APA Statutory Report, which compiled APA data for 2000, did not report the cumulative number of applications for those years by submission type, so the cumulative totals cannot be reported in that manner.

⁸ See supra note 7.

⁹ Industries in the Miscellaneous Manufacturing subsector (NAICS Code 339) make a wide range of products that cannot readily be classified in specific NAICS manufacturing subsectors.

¹⁰ APAs often cover more than one type of transaction.

¹¹ Not all the executed APAs involve a tested party.

¹² See Treas. Reg. § 1.482-5(b)(4)(ii)(A).

¹³ See Treas. Reg. § 1.482-5(b)(4)(ii)(B).

¹⁴ The majority of APAs that covered services transactions also included tangible/intangible transactions and are not tested under a separate PLI.

¹⁵ As a result, almost all occurrences of the hashtag in the template will be replaced with a caret or other text in the taxpayer’s draft APA. The few remaining occurrences of the hashtag will mark a placeholder phrase that cannot yet be replaced with appropriate text (see, for example, the placeholder phrase in paragraph 6(e) for a date that cannot be determined until the APA nears execution). Searching the draft APA for the hashtag will locate all placeholder phrases that still need replacement.

¹⁶ As used in this APA, "income allocation" includes allocation of loss.

This document contains proposed regulations under sections 4661, 4662, 4671, and 4672 of the Internal Revenue Code (Code) to amend the Environmental Tax Regulations (26 CFR part 52). Section 4661(a) imposes an excise tax on the sale or use of “taxable chemicals” by manufacturers, producers, or importers (section 4661 tax), and section 4662 provides definitions and special rules for applying the section 4661 tax. Section 4671(a) imposes an excise tax on the sale or use of “taxable substances” by importers (section 4671 tax), and section 4672 provides definitions and special rules for applying the section 4671 tax. The section 4661 tax and the section 4671 tax are collectively referred to as the “Superfund chemical taxes” because these excise taxes fund the Hazardous Substance Response Trust Fund established by section 221 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), Public Law 96-510, 94 Stat. 2767 (1980), informally referred to as “Superfund.”

The Superfund chemical taxes previously expired on December 31, 1995, but were reinstated with certain modifications, effective July 1, 2022, through December 31, 2031, by section 80201 of the Infrastructure Investment and Jobs Act (IIJA), Public Law 117-58, 135 Stat. 429 (November 15, 2021). The proposed regulations provide guidance on the application of the reinstated Superfund chemical taxes. As explained later in this Background section, the Treasury Department and the IRS have issued additional guidance on topics related to the reinstated Superfund chemical taxes that are not covered by the proposed regulations.

A. In General

The section 4661 tax was enacted as part of CERCLA to impose an excise tax on the sale or use of any taxable chemical by the manufacturer, producer, or importer of the taxable chemical. While section 4661(a) imposes tax on the sale of any taxable chemical, section 4662(c)(1) treats the use of a taxable chemical as a sale of the taxable chemical.

Section 4661(b) provides a table of 42 chemicals and the per-ton tax rate for each chemical. As reinstated by the IIJA, the per-ton tax rate for each of the 42 taxable chemicals in the table under section 4661(b) is double the per-ton tax rate previously imposed by section 4661 as in effect at the end of 1995.

The IIJA also amends section 4661(c), effective July 1, 2022, to provide that no section 4661 tax will be imposed after December 31, 2031.

B. Definition of Taxable Chemical and Other Terms

Under section 4662(a)(1), any chemical listed in the table under section 4661(b) is a “taxable chemical” if it is manufactured or produced in the United States or entered into the United States for consumption, use, or warehousing. Section 4662(a) also provides definitions of the terms “United States,” “importer,” and “ton,” as well as a rule that clarifies how the per-ton section 4661 tax is imposed on fractional parts of a ton.

C. Statutory Exceptions and Special Rules

Section 4662(b) provides exceptions from the definition of taxable chemical and special rules that apply to the section 4661 tax.

The following exceptions to the section 4661 tax provided by section 4662(b)(1) through (b)(4) were first enacted as part of CERCLA. Section 4662(b)(1) provides that methane or butane is treated as a taxable chemical only if it is used otherwise than as a fuel or in the manufacture or production of any motor fuel, diesel fuel, aviation fuel, or jet fuel, and that the person so using the fuel is treated as the manufacturer. Under section 4662(b)(2), generally no section 4661 tax is imposed on nitric acid, sulfuric acid, ammonia, or methane used to produce ammonia if used as a qualified fertilizer substance. Section 4662(b)(3) provides that no section 4661 tax is imposed in the case of sulfuric acid produced solely as a byproduct of and on the same site as air pollution control equipment. Finally, section 4662(b)(4) provides that the term taxable chemical does not include any substance to the extent derived from coal.

In addition to modifying the exceptions for methane and butane in section 4662(b)(1) and qualified fertilizer substances in section 4662(b)(2), section 1019 of the Tax Reform Act of 1984, enacted as Division A of the Deficit Reduction Act of 1984, Public Law 98-369, 98 Stat. 494, 1022 (July 18, 1984), added section 4662(b)(5) (providing generally that no section 4661 tax is imposed on several specified taxable chemicals used as a qualified fuel substance) and section 4662(b)(6) (providing generally that no section 4661 tax is imposed on several specified taxable chemicals by reason of the transitory presence of such chemical during any process of smelting, refining, or otherwise extracting any substance not subject to the section 4661 tax).

The Superfund Revenue Act of 1986 (Superfund Revenue Act), enacted as Title V of the Superfund Amendments and Reauthorization Act of 1986, Public Law 99-499, 100 Stat. 1613, 1760 (October 17, 1986), added the exceptions and special rules in section 4662(b)(7) through (10). Section 4662(b)(7) provides that except in the case of a substance imported into the United States or exported from the United States, the term xylene does not include any separated isomer of xylene. Section 4662(b)(8) generally provides that no section 4661 tax is imposed on any chromium, cobalt, or nickel that is diverted or recovered in the United States from any solid waste as part of a recycling process (and not as part of the original manufacturing or production process), and section 4662(b)(9) provides generally that no tax is imposed on certain taxable chemicals used as a qualified animal feed substance. Section 4662(b)(10) provides an exception from tax for sales of organic taxable chemicals while those chemicals are part of an intermediate hydrocarbon stream and imposes a registration requirement on both parties to the sale.

The Superfund Revenue Act also added section 4662(c)(2) to the Code, which provides a special rule exempting certain inventory exchanges of taxable chemicals from the section 4661 tax and imposes a registration requirement on both parties to the exchange to qualify for the exemption.

D. Credits and Refunds

Enacted as part of CERCLA, section 4662(d)(1) through (3) provides rules authorizing the Secretary of the Treasury or her delegate (Secretary) to provide regulations regarding credits and refunds of the section 4661 tax for (i) the use of a taxable chemical in the manufacture of another substance that is a taxable chemical, (ii) the use of certain taxable chemicals in the production of fertilizer, and (iii) the use of certain taxable chemicals as qualified fuel. Section 4662(d)(4), which was added by the Superfund Revenue Act, authorizes the Secretary to provide regulations regarding credits and refunds of the section 4661 tax for the use of certain taxable chemicals in the production of animal feed.

E. Export Exemption

The Superfund Revenue Act added section 4662(e) to the Code to provide an exemption for the exportation of taxable chemicals. Section 4662(e)(1)(A) allows for the tax-free sale of taxable chemicals for export. Section 4662(e)(1)(B) imposes a proof of export requirement and provides that rules similar to the rules of section 4221(b) (relating to tax-free sales for purposes of the manufacturers excise taxes codified in chapter 32 of the Code (chapter 32)) are to apply.

Section 4662(e)(2)(A) provides a mechanism for a credit or refund of the section 4661 tax paid on a taxable chemical, or on a taxable chemical that is used in the production of a taxable substance, that is exported. Section 4662(e)(2)(B) establishes conditions to allowance for a credit or refund under such circumstances.

Section 2001 of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Public Law 100-647, 102 Stat. 3342, 3593 (November 10, 1988), redesignated section 4662(e)(3) as section 4662(e)(4) and added a new section 4662(e)(3), which requires the Secretary to provide, by regulation, the circumstances under which a credit or refund may be allowed or made directly to the party that exported a taxable chemical or taxable substance. Section 4662(e)(4), as redesignated by TAMRA, requires the Secretary to issue regulations to carry out the purposes of section 4662(e).

A. In General

The section 4671 tax is imposed on any taxable substance sold or used by the importer thereof. The tax was added to the Code by section 515 of the Superfund Revenue Act. The term “taxable substance” is defined by section 4672(a), which is described in part III.B. of this Background section.

Section 4671(b) provides rules regarding how the amount of section 4671 tax is calculated. Section 4671(b)(1) provides that the amount of section 4671 tax is the amount of section 4661 tax that would have been imposed on the taxable chemicals used as materials in the manufacture or production of the taxable substance if such taxable chemicals had been sold in the United States for use in the manufacture or production of the taxable substance. If the importer does not furnish to the Secretary sufficient information to determine under section 4671(b)(1) the amount of section 4671 tax imposed on any taxable substance, section 4671(b)(2), as reinstated by the IIJA, provides that the amount of section 4671 tax imposed is 10 percent (instead of 5 percent as originally enacted) of the appraised value of the substance as of the time the taxable substance was entered into the United States for consumption, use, or warehousing. Section 4671(b)(3) provides that the Secretary may prescribe an amount of section 4671 tax for each taxable substance that will apply in lieu of the tax specified in section 4671(b)(2), equal to the amount of section 4671 tax that would be imposed with respect to a taxable substance if such substance were produced using the predominant method of production of such substance.

Section 4671(c) provides that no section 4671 tax is imposed on the sale or use of any substance if tax is imposed on such sale or use under section 4611 (imposing an excise tax on crude oil received at a United States refinery and on imported petroleum products entered into the United States for consumption, use, or warehousing). Section 4671(c) further provides that no section 4671 tax is imposed on the sale or use of any substance if such sale or use was subject to the section 4661 tax.

Section 4671(d) generally provides that rules similar to certain rules in section 4662(b) and (d) relating to exemptions for using substances as certain fuels or in the production of fertilizer or animal feed will apply with respect to taxable substances. Section 4671(d)(1) provides that rules similar to section 4662(b)(2), (5), and (9) (relating to tax-free sales of chemicals used as fuel or in the production of fertilizer or animal feed) apply with respect to taxable substances. Section 4671(d)(2) provides that rules similar to section 4662(d)(2), (3), and (4) (relating to credit or refund of tax on certain chemicals used as fuel or in the production of fertilizer or animal feed) apply with respect to taxable substances.

Section 4671(e), as amended by the IIJA effective July 1, 2022, provides that no section 4671 tax will be imposed after December 31, 2031.

B. List of Taxable Substances

For purposes of the section 4671 tax, section 4672(a)(1) provides that the term “taxable substance” means any substance that, at the time of sale or use by the importer, is listed as a taxable substance by the Secretary.

Section 4672(a) provides an initial list of taxable substances and mechanisms for adding substances to and removing substances from such list. There are two ways that a substance can be listed as a taxable substance. The first way a substance can be listed as a taxable substance, provided by section 4672(a)(2)(A), is if the substance is included in the initial list of taxable substances under section 4672(a)(3), as enacted by the Superfund Revenue Act. The second way, provided by section 4672(a)(2)(B) as amended by the IIJA, effective July 1, 2022, is if the Secretary determines, in consultation with the Administrator of the Environmental Protection Agency (EPA) and the Commissioner of U.S. Customs and Border Protection (CBP), that taxable chemicals constitute more than 20 percent of the weight or more than 20 percent of the value of the materials used to produce such substance, determined on the basis of the predominant method of production (more than 20-percent weight or value test). The last sentence of section 4672(a)(2) provides that if an importer or exporter of any substance requests that the Secretary determine whether such substance should be listed as a taxable substance under section 4672(a)(1) or be removed from such listing, the Secretary must make such determination within 180 days after the date the request was filed. See Rev. Proc. 2022-26 (2022-29 I.R.B. 90) for the exclusive process for making such requests. Further, section 4672(a)(4) provides that the Secretary must add to the list of taxable substances under section 4672(a)(3) those substances that meet the more than 20-percent weight or value test, and that the Secretary may remove from the list only substances that meet neither of such tests. The complete list of taxable substances under section 4672(a) is referred to in this preamble as the “Taxable Substances List.” The IRS will maintain the Taxable Substances List at https://www.irs.gov/businesses/small-businesses-self-employed/superfund-chemical-excise-taxes.

Section 4672(b)(1) and (2) provides additional definitions applicable to sections 4671 and 4672. Section 4672(b)(1) provides that the term “importer” means the person entering the taxable substance for consumption, use, or warehousing. Section 4672(b)(2) provides that the terms “taxable chemical” and “United States” have the respective meanings given such terms by section 4662(a).

The Superfund chemical taxes are codified in chapter 38 of the Code (chapter 38), which pertains to environmental excise taxes.

The procedural regulations governing chapter 38 taxes are contained in 26 CFR part 40 (Excise Tax Procedural Regulations). See 26 CFR 52.0-1 and 40.0-1(a). Chapter 38 taxes are reported on Form 6627, Environmental Taxes, which is required to be attached to Form 720, Quarterly Federal Excise Tax Return (Form 720 return). See §§40.0-1(a) and 40.6011(a)-1(a)(1) of the Excise Tax Procedural Regulations.

The procedural regulations in part 40 also provide that each business unit that has, or is required to have, a separate employer identification number (EIN) is treated as a separate person. See §40.0-1(d). Therefore, business units (for example, a parent corporation and a subsidiary corporation, a partner and the partner’s partnership, or the various members of a consolidated group), each of which has, or is required to have, a different EIN, are separate persons for purposes of filing quarterly Form 720 returns, quarterly payments of excise tax, semimonthly deposits of excise tax, and registration for certain excise tax activities.

A. Notice 2021-66 (preliminary guidance and request for comments)

Notice 2021-66 (2021-52 I.R.B. 901) provided guidance related to the Superfund chemical taxes, including the initial list of taxable substances as required by section 80201(c)(3) of the IIJA, guidance on registration requirements, and guidance on the procedural rules that apply to the Superfund chemical taxes. Notice 2021-66 also requested comments on whether any issues related to the reinstated Superfund chemical taxes require clarification or additional guidance.

The comments can be accessed via the Federal Rulemaking Portal at https://www.regulations.gov (type IRS-2021-0018 or Notice 2021-66 in the search field on the regulations.gov homepage to find the comments).

B. Notice 2022-15 (deposit penalty relief)

Under §40.6302(c)-1, taxpayers must make semimonthly deposits of the Superfund chemical excise taxes. Section 40.0-1(c) provides that a semimonthly period is the first fifteen (15) days of a calendar month or the portion of a calendar month following the 15th day of the month.

One commenter to Notice 2021-66 (commenter) requested deposit penalty relief. After considering the comment, the Treasury Department and the IRS issued Notice 2022-15 (2022-18 I.R.B. 1043) to provide transitional relief for the third and fourth calendar quarters of 2022, and the first calendar quarter of 2023, regarding the failure to deposit penalty imposed by section 6656 of the Code for failures to deposit Superfund chemical taxes through March 31, 2023, provided certain requirements are met.

C. Revenue Procedure 2022-26 (exclusive process for requesting modifications to the Taxable Substances List)

Notice 89-61 (1989-1 C.B. 717), as modified by Notice 95-39 (1995-1 C.B. 312), provided the previous process by which importers and exporters could request to add a substance to or remove a substance from the Taxable Substances List. Several commenters requested that the Treasury Department and the IRS provide an updated procedure by which importers and exporters may petition to add a substance to or remove a substance from the Taxable Substances List. Those commenters also requested that any new guidance provide notice of requests for modifications to the Taxable Substances List and an opportunity for public comment.

Rev. Proc. 2022-26 sets forth the exclusive process by which importers, exporters, and interested persons may petition to add a substance to or remove a substance from the Taxable Substances List. The process set forth in Rev Proc. 2022-26 provides for public notice of any petition and the opportunity for public comment.

Proposed §52.4661-1 sets forth general rules regarding the section 4661 tax, including rules regarding the imposition of tax, the attachment of tax, the persons liable for tax, the amount of tax, and the calculation of the amount of tax.

A. Attachment of Tax

1. General rule; foreign manufacturers

Proposed §52.4661-1(c)(1) clarifies that the section 4661 tax attaches to the first sale or use of a taxable chemical by the manufacturer, producer, or importer. This is consistent with Congressional intent that the tax apply only once to a given quantity of a taxable chemical. See S. Rep. No. 96-848, 96th Cong., 2d Sess. 21 (1980) (“A number of provisions are included in the fee system to assure an equitable fee which avoids unintended economic impacts, including: a provision which allows only one fee collection on any given quantity.”).

Proposed §52.4661-1(c)(2) clarifies that in situations involving a foreign manufacturer, the section 4661 tax does not attach to the foreign manufacturer’s sale of a substance listed in the table under section 4661(b) to the importer because the substance is not a taxable chemical at the time of such sale; rather, tax attaches to the importer’s first sale or use of the taxable chemical. This rule is consistent with section 4661(a) and the definition of the term “taxable chemical” in section 4662(a)(1). It is also consistent with the overall statutory scheme of excise taxes and relevant case law. See, e.g., Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931) (excise tax is not imposed on the importation of a taxable motorcycle, but rather on the first sale by the importer).

2. Dilution of chemical mixtures

Proposed §52.4661-1(c)(1) clarifies that in the case of chemical mixtures containing one or more chemicals with respect to which tax was paid (tax-paid chemicals), no section 4661 tax attaches when the chemical mixture is diluted with a solvent to change the concentration of the chemical mixture, provided the solvent is not a taxable chemical. The proposed regulations take this approach because the section 4661 tax has already been paid on the taxable chemicals in the chemical mixture, and the taxable chemicals in the chemical mixture do not lose their identity during the dilution process.

3. Chemical mixtures and chemical compounds

A chemical mixture is generally any substance composed of two or more physically-combined components that are not chemically bonded. Chemical mixtures include solutions, suspensions, and alloys. If a taxable chemical is a component of a chemical mixture, the taxable chemical remains a taxable chemical while it is part of the chemical mixture.

In contrast, a chemical compound is generally any substance composed of identical molecules, each of which consists of two or more atoms of the same or different elements held together by chemical bonds. A taxable chemical used to produce a chemical compound does not retain its individual properties.

With regard to domestically-produced chemical mixtures, the manufacture or production of a chemical mixture is a “use” of the taxable chemicals in the chemical mixture under proposed §52.4662-1(c)(15), and the section 4661 tax attaches at the time of such use. However, the “use” definition does not capture any taxable chemicals found in imported chemical mixtures. Therefore, the taxable chemicals found in an imported chemical mixture could completely escape the section 4661 tax unless the importer engages in a manufacturing process of separating the taxable chemicals in the mixture (such a process would make the importer the manufacturer of the taxable chemicals in the mixture) and then sells or uses those taxable chemicals. This would give foreign manufacturers of chemical mixtures a competitive advantage over domestic manufacturers of the same chemical mixtures.

To address this disparity, proposed §52.4661-1(c)(3) provides that when a taxable chemical is part of an imported chemical mixture that is not a taxable substance (as defined in section 4672(a)(1) and proposed §52.4672-1(b)(8)), tax attaches to the first sale or use of the chemical mixture by the importer. Further, proposed §52.4661-1(f)(2) includes a rule regarding the calculation of the amount of tax with regard to chemical mixtures. More specifically, under proposed §52.4661-1(f)(2)(ii), when a taxable chemical is part of an imported chemical mixture that is not a taxable substance, as defined in section 4672(a)(1) and proposed §52.4672-1(b)(8), tax is imposed on the actual weight of any taxable chemicals in the chemical mixture at the time the importer first sells or uses the chemical mixture. These rules ensure that foreign and domestic manufacturers of chemical mixtures are treated the same for purposes of the section 4661 tax. The approach is supported by the fact that a taxable chemical in a chemical mixture is assumed to retain its chemical identity while part of the chemical mixture. There is also support for this position in case law. See Murphy Oil USA, Inc. v. United States, 81 F. Supp. 2d 942 (W.D. Ark. 1999) (section 4661 tax is imposed on the taxable chemicals in a chemical mixture).

As with chemical mixtures, the domestic manufacture or production of a chemical compound with one or more taxable chemicals is a taxable use of the taxable chemicals. Therefore, the domestic manufacturer or producer of the chemical compound is liable for the section 4661 tax. However, because a taxable chemical used to produce a chemical compound does not retain its chemical identity, the Treasury Department and the IRS lack the authority under sections 4661 and 4662 to tax the taxable chemicals used in the production of imported chemical compounds. This creates an advantage for foreign manufacturers of chemical compounds that are produced with taxable chemicals but that are not taxable substances, as defined in section 4672(a) and proposed §52.4672-1(b)(8). The Treasury Department and the IRS request comments on possible ways to mitigate the disadvantage to domestic manufacturers within the constraints of the statutory scheme.

4. Ores and metals

Several taxable chemicals, including nickel, cobalt, chromium, and phosphorus, are produced from ores. In addition, one taxable chemical, chromite, is an ore. The production of a taxable chemical from ore requires mining the ore to extract the ore from the earth, and an extraction, smelting, or other process to remove or refine the taxable chemical from the ore.

Proposed §52.4661-1(c)(4)(i) provides, generally, that in the case of ores, the section 4661 tax attaches to the first sale or use of the taxable chemical by the manufacturer, producer, or importer after extraction of the taxable chemical from the ore, and the person that extracts the taxable chemical from the ore is the manufacturer of the taxable chemical. Proposed §52.4661-1(c)(4)(i) further provides that the term “extraction of a taxable chemical from the ore” means the first process in the United States that a person uses to separate the taxable chemical from the ore.

As noted earlier, chromite is both a taxable chemical and an ore; therefore, it is treated differently from taxable chemicals that are produced from ores. Proposed §52.4661-1(c)(4)(ii) provides that in the case of chromite, the section 4661 tax attaches to the first sale or use of chromite by the manufacturer, producer, or importer after the chromite is mined. Under the proposed regulations, the tax treatment of taxable chemicals that are metals under section 4661 is generally addressed by the rule regarding ores. The Treasury Department and the IRS request comments on whether an additional or alternative rule for metals would be appropriate or warranted.

B. Procedural Rules; Definition of Person

Proposed §52.4661-1(d) notes that the procedural rules in 26 CFR part 40 apply to the section 4661 tax. Proposed §52.4661-1(d) further notes that each business unit that has, or is required to have, a separate EIN is treated as a separate person for purposes of filing excise tax returns, making semimonthly deposits of excise tax, making payments of excise tax, and applying for the registration required under section 4662(b)(10)(C) and (c)(2)(B). See §40.0-1(d). Proposed §52.4671-1(d) is a similar provision related to the section 4671 tax.

C. Calculation of the Amount of Tax

1. Measurement and documentation regarding tonnage

Proposed §52.4661-1(f) provides rules regarding how to calculate the amount of section 4661 tax. As noted earlier, the section 4661 tax applies at a specified rate per ton.

One commenter requested flexibility in how to measure and document tonnage, but did not elaborate on what type of information is generally available in the industry that could potentially be used as a metric for measuring tonnage, on whether different sectors of the industry might require different options for measuring tonnage, or on the degree of specificity that could be attained by using a metric other than the actual weight. The Treasury Department and the IRS lack sufficient information about possible ways to measure tonnage, other than by using the actual weight of the taxable chemical. The Treasury Department and the IRS are also concerned that a broad rule, such as one that would allow any reasonable method of measurement, could artificially reduce the tax base. For these reasons, proposed §52.4661-1(f)(2)(i) provides that for purposes of calculating the amount of section 4661 tax, the weight of a taxable chemical, measured in tons, is the actual weight of the taxable chemical at the time of sale or use by the manufacturer, producer, or importer.

The Treasury Department and the IRS request comments on any other appropriate methods that could be used to measure tonnage, with specificity and without artificially reducing the tax base. The Treasury Department and the IRS also request comments on the types of documentation available in the industry that could be used as records to support a weight measurement.

2. Conversion required for volumetric measurements

A taxable chemical may be measured in volumetric units. Because the section 4661 tax is imposed at a rate per ton, any volumetric units must be converted to weight units in order to calculate the amount of section 4661 tax. Proposed §52.4661-1(f)(2)(iii) requires that any volumetric measurement of a taxable chemical be converted to a weight measurement and provides a formula for volume-to-weight conversions.

As noted earlier, sections 4661 and 4662(c)(1) impose a tax on the sale or use of a taxable chemical by the manufacturer, producer, or importer. Several commenters requested that the Treasury Department and the IRS provide definitions of the terms “manufacturer,” “importer,” “sale,” and “use.” The definitions in proposed §52.4662-1 include those definitions requested by commenters, as well as others that are necessary to provide clarity with regard to the application of sections 4661 and 4662.

A. Taxable Chemical

As discussed in section II of the Background section, section 4662(a)(1) generally defines the term “taxable chemical” as any substance (A) that is listed in the table under section 4661(b), and (B) that is manufactured or produced in the United States or entered into the United States for consumption, use, or warehousing. The table under section 4661(b) includes only the name of each taxable chemical. The taxable chemicals listed in the table under section 4661(b) include metals, metalloids, minerals, and an ore (chromite).

The proposed regulations clarify that a substance is a taxable chemical only if it satisfies both prongs of the definition of “taxable chemical” in section 4662(a)(1). In addition, the proposed regulations provide that, except as provided in section 4662(b), a substance is listed in the table under section 4661(b) if it has the same name and molecular formula as a substance listed in the table under section 4661(b). The proposed regulations further provide that all isomeric forms of a substance listed in the table under section 4661(b) are treated as having the same name and molecular formula of the substance. Therefore, except as provided in section 4662(b)(7) with respect to xylene, an isomer of a substance listed in the table under section 4661(b) is a substance listed in the table under section 4661(b).

B. Importer

Section 4662(a)(3) defines the term “importer” as the person entering the taxable chemical for consumption, use, or warehousing. The proposed regulations clarify that if the person entering the taxable chemical for consumption, use, or warehousing is merely acting as an agent or a customs broker for another person, then the agent or customs broker is not the importer, and the importer is the first person in the United States to sell or use the taxable chemical after entry of the taxable chemical for consumption, use, or warehousing. The proposed regulations also address how to identify the importer with regard to sales that involve drop shipping a taxable chemical when the party shipping the taxable chemical is outside the United States.

C. Manufacturer

Neither section 4661 nor section 4662 defines the term “manufacturer.” Proposed §52.4662-1(c)(6)(i) defines the term “manufacturer” as any person that produces a taxable chemical from new or raw material, feedstocks, or other substances, or from scrap, salvage, waste, or recycled substances. Further, under the proposed regulations, a manufacturer includes any person that produces a taxable chemical from the mining process, or extracts, isolates, separates, or otherwise removes a taxable chemical from an ore or from another substance. A manufacturer also includes any person that produces a taxable chemical by processing or manipulating a substance, such as through the oxidation process. The term manufacturer does not include a person that dilutes a chemical mixture comprised of one or more tax-paid chemicals with a solvent that is not a taxable chemical.

One commenter requested that recyclers be excluded from the definition of the term “manufacturer.” Section 4662(b)(8)(A) provides that no section 4661 tax is imposed on any chromium, cobalt, or nickel which is diverted or recovered in the United States from any solid waste as part of a recycling process (and not as part of the original manufacturing or production process). The explicit reference to recycling activities in section 4662(b)(8)(A), combined with the absence of a general exception for recycling activities in sections 4661 and 4662, suggest that Congress did not intend to exclude persons engaged in recycling activities from the definition of the term “manufacturer.” Accordingly, the proposed regulations do not adopt this suggestion.

Proposed §52.4662-1(c)(6)(ii) addresses contract manufacturing. More specifically, proposed §52.4662-1(c)(6)(ii) provides that if a person manufactures or produces a taxable chemical for a second person, pursuant to a contract, order, or agreement and in accordance with the second person’s specifications, or if a person manufactures or produces a taxable chemical for a second person from materials owned by the second person, the second person (and not the first person) is treated as the manufacturer of the taxable chemical manufactured or produced by the first person.

D. Sale

Neither section 4661 nor section 4662 defines the term “sale.” Proposed §52.4662-1(c)(8) defines the term “sale” as the transfer of title or substantial incidents of ownership (whether or not delivery to, or payment by, the purchaser has been made) in a taxable chemical for a consideration, which may include, but is not limited to, money, services, or property.

One commenter requested an exclusion from the definition of the term “sale” for sales of intermediate hydrocarbon streams and inventory exchanges if both parties to the sale or exchange are taxable chemical registrants. Section 4662(b)(10) and (c)(2) provide exceptions to the section 4661 tax in the scenarios described by the commenter when both parties are registered; therefore, there is no need for a carve out from the definition of the term “sale.”

E. Ton

Section 4662(a)(4) defines the term “ton” to mean 2,000 pounds, which is a short ton. Proposed §52.4662-1(c)(13) follows the statutory definition.

F. Use

Neither section 4661 nor section 4662 defines the term “use.” Proposed §52.4662-1(c)(15) defines the term “use” broadly. More specifically, proposed §52.4662-1(c)(15) provides that a taxable chemical is used when it is consumed, when it functions as a catalyst, when its chemical composition changes, when it is used in the manufacture or production of a chemical mixture or other substance (including by mixing or combining the taxable chemical with other substances), or when it is put into service in a trade or business for the production of income. The loss or destruction of a taxable chemical through spillage, fire, natural degradation, or other casualty is not a use. The mere manufacture or production of a taxable chemical is not a use of that chemical.

The legislative history of CERCLA notes that in determining how industrial fees should be levied, Congress “moved away from imposing fees on wastes and hazardous end-products, and instead approved a system which imposes fees on the relatively few basic building blocks used to make all hazardous products and wastes.” S. Rep. No. 96-848, 96th Cong., 2d Sess. 19 (1980) (quoted language from the Committee Report by the Senate Environment and Public Works Committee on an early draft of S.1480). The legislative history further notes that tax is to be imposed “at an early step in the industrial chain of production, distribution, consumption, and disposal.” Id. at 20. The definition of “use” in the proposed regulations is consistent with the legislative history.

Section 4662(b) provides a number of exceptions and special rules that apply to the section 4661 tax. Some of the provisions in section 4662(b) provide exceptions to the definition of “taxable chemical”; other provisions provide general exceptions to the section 4661 tax.

A. Methane or Butane Used as Fuel

Methane and butane are included in the list of taxable chemicals in section 4661(b). Section 4662(b)(1) provides that methane or butane is treated as a taxable chemical only if it is used otherwise than as a fuel or otherwise than in the manufacture or production of any motor fuel, diesel fuel, aviation fuel, or jet fuel. In such cases, the person so using the methane or butane is treated as the manufacturer.

The section 4662(b)(1) rule impacts the timing of the imposition of the section 4661 tax. Unlike other chemicals included in the list of taxable chemicals in section 4661(b) that are taxable chemicals at the time of manufacture, production, or importation, the status of methane or butane as a taxable chemical cannot be determined until the time of use. As a result, it is possible that methane or butane will never become a taxable chemical and no section 4661 tax will attach. It is also possible that there will be intervening sales of methane or butane before the section 4661 tax is imposed.

Proposed §52.4662-2(a)(2) provides that methane or butane is used otherwise than as a fuel when it is used other than in the production of energy. Proposed §52.4662-2(a)(2) further provides that methane or butane is used as a fuel when it is used in the production of energy. It also provides examples of when methane or butane is used as a fuel. The rule in the proposed regulations regarding use as a fuel is consistent with existing guidance in other areas of excise tax. See section 2(f) of Notice 2006-92 (2006-43 I.R.B. 774) (providing guidance on use as a fuel relating to excise tax on alternative fuel mixtures).

B. Qualified Fertilizer, Fuel, and Animal Feed Substances

Section 4662(b)(2), (5), and (9) provide exceptions to the section 4661 tax for certain taxable chemicals that are qualified fertilizer, fuel, or animal feed substances. Proposed §52.4662-2(b) provides rules regarding the exception for qualified fertilizer substances. Proposed §52.4662-2(e) provides rules regarding the exception for qualified fuel substances. Proposed §52.4662-2(f) provides rules regarding the exception for qualified animal feed substances.

One commenter highlighted the need for guidance on tax-free sales under the fertilizer exception and requested clarification on whether tax-free sales are limited to one intervening sale. That commenter also requested guidance on how to make claims for credit and refund. Another commenter requested that the Treasury Department and the IRS provide model certificates for tax-free sales. The proposed regulations address those issues. Proposed §52.4662-2(h) provides rules regarding tax-free sales under section 4662(b)(2), (5), and (9) and clarifies that the exception is available for multiple intervening sales. The provisions in proposed §52.4662-2(h) are similar to tax-free sale rules in other areas of excise tax and include a model exemption certificate. To lessen the burden on taxpayers, proposed §52.4662-2(h) allows for a “blanket” exemption certificate that may be used for a period of up to one (1) year.

C. Sulfuric Acid Produced as a Byproduct of Air Pollution Control Equipment

Section 4662(b)(3) provides that no section 4661 tax is imposed on sulfuric acid produced solely as a byproduct of and on the same site as air pollution control equipment. The statute does not define the term “air pollution control equipment” for purposes of this exception. Further, the statute is silent with regard to whether the exception applies to sulfuric acid produced solely as a byproduct of and on the same site as air pollution control equipment located outside the United States.

Proposed §52.4662-2(c) defines the term “air pollution control equipment” as any equipment used to comply with the Clean Air Act, including any amendments thereto, as codified in 42 U.S.C. chapter 85, or any similar provision under state law. This definition effectively limits the exception to domestically-produced sulfuric acid. The Treasury Department and the IRS request comments on the definition of “air pollution control equipment” in proposed §52.4662-2(c). To the extent commenters believe the definition should be modified, the Treasury Department and the IRS request comments on the type of documentation that is available to demonstrate to the IRS that sulfuric acid produced outside the United States was, in fact, produced solely as a byproduct of and on the same site as air pollution control equipment.

D. Taxable Chemicals Produced from Coal

Section 4662(b)(4) provides that the term “taxable chemical” does not include any substance derived from coal. Proposed §52.4662-2(d) defines the term “coal” as bituminous coal, subbituminous coal, anthracite, and lignite.

E. Intermediate Hydrocarbon Streams

Section 4662(b)(10)(A) provides that no section 4661 tax is imposed on any organic taxable chemical while such chemical is part of an intermediate hydrocarbon stream containing one or more organic taxable chemicals. Section 4662(b)(10)(B) provides that if any organic taxable chemical on which no section 4661 tax was previously imposed by reason of section 4662(b)(10)(A) is isolated, extracted, or otherwise removed from, or ceases to be part of (collectively, isolation), an intermediate hydrocarbon stream, such isolation is treated as a use by the person causing the isolation, and such person is treated as the manufacturer of the organic taxable chemical so isolated.

1. Definition of “organic taxable chemical”

Section 4662(b)(10)(D) defines “organic taxable chemical” as any taxable chemical that is an organic substance. At the most basic level, an organic substance is a substance that contains carbon and hydrogen atoms.

The organic substances that are listed in the table under section 4661(b) are acetylene, benzene, butane, butylene, butadiene, ethylene, methane, naphthalene, propylene, toluene, and xylene. See H.R. Rep. No. 99-962, 99th Cong., 2d Sess., at 328 n. 6 (1986). However, neither the statute nor the legislative history addresses the interplay between section 4662(b)(1) and (10) with regard to methane and butane. Although methane and butane are organic substances that are listed in the table in section 4661(b), they are treated as taxable chemicals only when used otherwise than as a fuel or otherwise than in the production of any motor fuel, diesel fuel, aviation fuel, or jet fuel. See section 4662(b)(1) and proposed §52.4662-2(a). Therefore, methane and butane are not organic taxable chemicals at the time of isolation from an intermediate hydrocarbon stream. See section 4662(b)(1) and proposed §52.4662-2(a) and (g). Proposed §52.4662-2(g)(2)(i) clarifies that no section 4661 tax is imposed on methane or butane at the time the methane or butane is isolated from an intermediate hydrocarbon stream and includes an example to illustrate this rule.

2. Multi-step isolation process

The rule in section 4661(b)(10) is clear with regard to organic taxable chemicals isolated from an intermediate hydrocarbon stream as part of a single-step isolation process. However, neither the statute nor the legislative history addresses what happens when isolation is a multi-step process.

In Murphy Oil USA, Inc. v. United States, 81 F. Supp. 2d 942 (W.D. Ark. 1999), the court considered the applicability of section 4662(b)(10) to a multi-step process of isolating propylene from a C3/C4 hydrocarbon stream. The court held that the splitting process designed to isolate and extract the propylene content from the C3/C4 stream as refinery-grade propylene was the point of isolation, even though the resulting refinery-grade propylene was a mixture of propylene and propane that could have been further processed into a purer grade of propylene. The court further held that because the weight of the propylene in the refinery-grade propylene could be determined with specificity, the section 4661 tax was imposed only on the weight of the propylene in the refinery-grade propylene.

Proposed §52.4662-2(g)(3)(ii) follows the holding in the Murphy Oil case and clarifies that when the isolation of an organic taxable chemical from an intermediate hydrocarbon stream is a multi-step process, the first process that a person uses to isolate, extract, or otherwise remove the organic taxable chemical from the intermediate hydrocarbon stream (even if the organic taxable chemical is, at that time, still mixed with other substances and further processing is possible, but not required) is treated as a use by the person causing the isolation, and such person is treated as the manufacturer of the organic taxable chemical so isolated. Proposed §52.4662-2(g)(3)(ii) further clarifies that if the organic taxable chemical is part of a chemical mixture at the time of isolation, the section 4661 tax is imposed on the weight of the entire chemical mixture, unless the person causing the isolation can establish, with specificity, the weight of the organic taxable chemical or chemicals contained in the chemical mixture.

Section 4662(d) provides a mechanism for a credit or refund of the section 4661 tax with regard to certain specified uses of taxable chemicals. Multiple commenters requested that the Treasury Department and the IRS provide guidance on claims for credit and refund. One commenter requested specific guidance on the use of invoices to support credit and refund claims.

Proposed §52.4662-4 provides rules regarding claims for credit and refund under section 4662(d). The provisions in proposed §52.4662-4 explain the general rules, conditions to allowance, and supporting information required for claims for credit and refund. Proposed §52.4662-4 also includes a model certificate to support a claim for credit or refund. The approach taken in the proposed regulations is consistent with other areas of excise tax law.

Section 4662(e)(1)(A) provides that no section 4661 tax is imposed on the sale by the manufacturer or producer of any taxable chemical for export or for resale by the purchaser to a second purchaser for export. Section 4662(e)(1)(B) provides that rules similar to section 4221(b) (relating to exports exempt from manufacturers excise taxes codified in chapter 32) apply. Proposed §52.4662-5(b) provides rules regarding how to effectuate tax-free sales for export under section 4662(e)(1). The rules in proposed §52.4662-5(b) are based on the rules in §48.4221-3 of the Manufacturers and Retailers Excise Tax Regulations, and include a model exemption certificate and a model statement of export.

Section 4662(e)(2) provides the general rule for claims for credit or refund of the section 4661 tax in the case of taxable chemicals that are exported, and taxable chemicals used as materials in the manufacture or production of a substance that is a taxable substance (that is, it is listed on the Taxable Substances List) at the time of export. Proposed §52.4662-5(c) provides rules regarding claims for credit or refund under section 4662(e)(2).

Several commenters expressed concern about not being able to make credit or refund claims for taxable chemicals used in the manufacture of substances that meet the more than 20-percent weight or value test but have not yet been added to the Taxable Substances List. The requirement that a substance be on the Taxable Substance List at the time of export in order to make a claim for credit or refund is statutory. See section 4662(e)(2). The Treasury Department and the IRS request comments on possible ways to mitigate the impact of the express statutory language in section 4662(e)(2).

Section 4662(e)(3) provides a mechanism for an exporter to make claims for credit or refund. Proposed §52.4662-5(d) provides rules regarding claims for credit or refund under section 4662(e)(3).

General rules regarding the section 4671 tax are set forth in proposed §52.4671-1, including rules regarding the imposition of tax, the persons liable for tax, the attachment of tax, the amount of tax, and the calculation of the amount of tax. Proposed §52.4671-2 provides rules regarding tax-free sales under section 4671(d)(1) and claims for credit and refund under section 4671(d)(2).

Proposed §52.4672-1 provides definitions applicable to sections 4671 and 4672. To the extent there is overlap, the definitions in proposed §52.4672-1 with respect to the section 4671 tax track the definitions in section §52.4662-1 with respect to the section 4661 tax.

Sections 4671(b)(3) and 4672(a)(2) use the term “predominant method of production.” However, the term is undefined by statute. The legislative history is limited and provides only that with regard to the determination of substances on the Taxable Substances List, the determination is to be made “on the basis of the predominant method of production (with respect to imported derivatives) using stoichiometric material consumption assuming a 100-percent yield.” Conf. Rep. 962, 99th Cong., 2d Sess. (1987), 1987-1 C.B. 383, 386-7.

Proposed §52.4672-1(b)(4) defines the term “predominant method of production” to mean the method used to produce the greatest number of tons of a particular substance worldwide, relative to the total number of tons of the substance produced worldwide. The definition uses worldwide production as the metric because the term “predominant method of production” applies only in the context of the section 4671 tax, which is imposed on imported substances.

The Treasury Department and the IRS request comments on the predominant method of production, or any other relevant information (such as the weight or value of the taxable chemicals used in the manufacture or production of the taxable substance), for the following taxable substances that are included in the statutory list in section 4672(a)(3): ferronickel; formaldehyde; hydrogen peroxide; methanol; nickel powders; nickel waste and scrap; polystyrene resins and copolymers; styrene-butadiene, snpf; synthetic rubber, not containing fillers; unwrought nickel; vinyl resins; vinyl resins, nspf; and wrought nickel rods and wires.

Section 4671(d)(1) provides that rules similar to those in section 4662(b)(2), (5), and (9) apply with respect to taxable substances used or sold for use as described in such rules. Proposed §52.4671-2(b) provides rules regarding how to effectuate tax-free sales under section 4671(d)(1); the rules are similar to those in proposed §52.4662-2(h).

Section 4671(d)(2) provides that rules similar to section 4662(d)(2), (3), and (4) apply with respect to taxable substances used or sold for use as described in such rules. Proposed §52.4671-2(c) provides rules regarding claims for credit or refund under section 4671(d)(2); the rules are similar to those in proposed §52.4662-4.

When the Superfund chemical taxes were previously in effect, Notice 89-61 provided a determination process by which importers and exporters of substances could request modifications to the Taxable Substances List pursuant to the flush language of section 4672(a)(2). Notice 89-61 provided that textile fibers, yarns, and staple, and fabricated products that are molded, formed, woven, or otherwise finished into end-use products were ineligible for addition to the Taxable Substances List. Notice 95-39 modified Notice 89-61 to allow polymers extruded in fiber form to be added to the Taxable Substances List.

Proposed §52.4672-1(b) incorporates the rules from Notice 89-61 and Notice 95-39 regarding the types of substances that may be added to the Taxable Substances List if they otherwise meet the more than 20-percent weight or value test. These rules were also incorporated into the definition of the term “substance” in section 3.10 of Rev. Proc. 2022-26.

A. Sales Between Certain Registrants

Two commenters requested that the Treasury Department and the IRS adopt a practice with respect to sales of taxable chemicals that is similar to what is in place for “S” registrants for fuel transactions. One commenter suggested an expansion of “G” registration and an allowance of tax-free sales among all “G” registrants.

In the fuel excise tax area, section 4081 of the Code establishes the bulk transfer system and the ability for “S” registrants to make tax-free sales of taxable fuel. More specifically, section 4081(a)(1)(B)(i) expressly exempts certain removals and entries of taxable fuel within the bulk transfer system and imposes registration requirements. There is no such statutory directive with regard to the Superfund chemical taxes, and such an approach would be inconsistent with the statutory text and legislative history of the section 4661 tax. Therefore, the proposed regulations do not adopt this suggestion.

B. Modifications to the Taxable Substances List

Several commenters requested the addition of substances to or the removal of substances from the Taxable Substances List. Such comments are not considered requests to add to or remove from the Taxable Substances List and will not be processed. All requests to add substances to or remove substances from the Taxable Substances List must be submitted in accordance with the procedures set forth in Rev. Proc. 2022-26, which provides the exclusive process by which importers, exporters, and other interested persons may petition to add a substance to or remove a substance from the Taxable Substances List.

C. Delayed Implementation of Superfund Chemical Taxes

Multiple commenters requested that the Treasury Department and the IRS delay implementation of the Superfund chemical taxes until January 1, 2023. The IIJA reinstates the Superfund chemical taxes as of July 1, 2022. The Treasury Department and the IRS do not have the authority to modify the effective date of the Superfund chemical taxes, which is statutory. Accordingly, the Superfund chemical taxes are effective July 1, 2022, as required by law.

D. Harmonized Tariff Schedule (HTS) and Chemical Abstract Service (CAS) Numbers

Several commenters requested that the Treasury Department and the IRS provide HTS and CAS numbers for all taxable chemicals and taxable substances to ensure uniform identification by stakeholders and the IRS.

The U.S. International Trade Commission maintains and publishes HTS numbers. The Chemical Abstract Service maintains CAS numbers. CAS is a division of the American Chemical Society, a non-profit organization that holds a congressional charter under title 36, United States Code. The Treasury Department and the IRS are considering the request to provide HTS and CAS numbers and how those numbers can be verified with the appropriate experts. The Treasury Department and the IRS request comments on the degree of specificity that would be required for HTS and CAS numbers. Specifically, the Treasury Department and the IRS request comments on the appropriate number of decimal places for the HTS and CAS numbers that would be used to identify taxable chemicals and taxable substances.

Executive Orders 13563 and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits, including potential economic, environmental, public health and safety effects, distributive impacts, and equity. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

The proposed regulations have been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. OIRA has determined that the proposed rulemaking is significant and subject to review under Executive Order 12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by OMB.

A. Background

As noted earlier, CERCLA, known colloquially as “Superfund,” was enacted, in part, to create a hazardous substance cleanup program. Section 221 of CERCLA established the “Hazardous Substance Response Trust Fund,” which was funded, in part, by the Superfund chemical taxes. The Superfund chemical taxes expired on December 31, 1995.

Effective July 1, 2022, section 80201 of the IIJA reinstates the Superfund chemical taxes with certain modifications. Pursuant to section 80201(c)(3) of the IIJA, Notice 2021-66 provided initial guidance related to the Superfund chemical taxes.

B. Need for Proposed Regulations

The proposed regulations generally provide structure and clarity for the implementation of the Superfund chemical taxes as reinstated by IIJA. However, the Treasury Department and the IRS determined that there remained outstanding issues requiring clarification that should be subject to notice and comment. In addition to clarifying statutory rules in sections 4661 and 4671 regarding the Superfund chemical tax procedural rules and computation of tax, these proposed regulations provide definitions that track the statutory language and otherwise borrow from existing excise tax rules, including regulations relating to ozone-depleting chemicals and manufacturers excise taxes. The proposed regulations provide procedural guidance regarding tax-free sales of certain taxable chemicals and taxable substances. Finally, the proposed regulations provide procedures for taxpayers to claim credits and refunds of Superfund chemical taxes paid with respect to taxable chemicals or taxable substances sold for use or used for certain purposes.

C. Baseline

The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulation relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of this regulation.

D. Affected Entities

The Superfund chemical taxes are excise taxes imposed on any manufacturer, producer, or importer that sells or uses taxable chemicals or taxable substances. The taxes are reported on excise tax forms, separate from corporate or individual income tax forms. The Superfund chemical taxes are expected to be paid by industrial chemical companies, which include various manufacturing, refining, and wholesaler firms. The extent to which the cost of the Superfund chemical taxes will be passed down to the eventual consumers of products containing the taxable chemicals or taxable substances is variable across a wide array of products.

After the expiration of the Superfund chemical taxes on December 31, 1995, the number of quarterly excise tax filers fell by approximately 5,500 taxpayers. This number is a reasonable estimate of the number of Superfund chemical tax filers in 1995, as the Superfund chemical taxes were the only excise taxes to have expired at that time and the Superfund petroleum tax filers would still be paying the Oil Spill Liability excise taxes, and therefore had not stopped filing quarterly excise forms. However, the make-up of the chemical and manufacturing industries is expected to have changed since the previous imposition of the Superfund chemical taxes. In addition, section 80201(c)(1) of the IIJA modifies the method under section 4672(a)(2)(B) of the Code for determining whether a substance is a taxable substance by lowering the required percentage of taxable chemicals used to produce the substance from 50 percent to 20 percent of the weight (or the value) of the materials used to produce such substance. Given the changes in the application of the Superfund chemical taxes, the Treasury Department and the IRS do not have readily available data to quantify the impact of the excise taxes. The Treasury Department and the IRS invite comments, especially data sets or analyses, on the number of affected taxpayers.

E. Economic Analysis of the Proposed Regulations

The proposed regulations provide certainty and consistency in the application of Superfund chemical taxes by providing definitions and clarifications regarding the statutes’ terms and rules. In addition, the proposed regulations provide model certificates and examples for the taxpayer to follow. An economically efficient tax system generally aims to treat income and expense derived from similar economic decisions consistently across taxpayers and activities in order to reduce incentives for individuals and businesses to make choices based on tax rather than market incentives. In the absence of the guidance provided in these proposed regulations, taxpayers would bear the burden of interpreting the statute and the chances that different taxpayers might interpret the statute differently would be exacerbated. For example, two similarly-situated taxpayers might interpret the statutory provisions pertaining to the calculation of tax differently or reach different conclusions regarding eligibility for exemptions from the Superfund chemical taxes. Thus, lack of certainty may lead to very different tax liabilities for taxpayers undertaking similar activities. The Treasury Department and the IRS invite comments, especially data sets or analyses, of the impact of the proposed regulations.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (“Paperwork Reduction Act”) requires that a federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit.

Overview

The collections of information in these proposed regulations are in: Proposed §§52.4662-2(g)(5) (notification certificate for intermediate hydrocarbon streams under section 4662(b)(10)); 52.4662-2(h)(2) (exemption certificate for tax-free sales for fertilizer, motor fuel, and animal feed substances under section 4662(b)); 52.4662-3(c) (notification certificate for inventory exchanges under section 4662(c)); 52.4662-4(a)(4) (supporting information required for claims for credit and refund under section 4662(d)(1)); 52.4662-4(b)(3) (supporting information required for claims for credit and refund under section 4662(d)(2)); 52.4662-4(c)(3) (supporting information required for claims for credit and refund under section 4662(d)(3)); 52.4662-4(d)(3) (supporting information required for claims for credit and refund under section 4662(d)(4)); 52.4662-4(e)(2) (certificate to support claims for credit and refund under section 4662(d)); 52.4662-5(b)(5) (exemption certificate for tax-free sales for export under section 4662(e)(1)); 52.4662-5(c)(3) (supporting information required for claims for credit and refund under section 4662(e)(2)); 52.4662-5(d)(3) (supporting information required for claims for credit and refund by the exporter under section 4662(e)(3)); 52.4671-2(b)(3) (exemption certificate for tax-free sales for fertilizer, motor fuel, and animal feed substances under section 4672(d)(1)); 52.4671-2(c)(3) (supporting information required for claims for credit or refund under section 4671(d)(2)); and 52.4672-2(c)(4) (certificate to support claims for credit or refund under section 4671(d)(2)).

Estimated burden

The IRS Taxpayer Burden Model cannot be used to calculate reporting burden not associated with economic activity, as is the case with the required reporting in these proposed regulations. Therefore, the IRS is providing off-model estimates of the burden associated with these proposed regulations. The estimated time to complete a notification certificate is 15 to 30 minutes. It is estimated that 100 to 1,000 taxpayers will complete a notification certificate. The estimated minimum burden imposed by the notification certificate is 25 hours (100 taxpayers x .25 hours), and the estimated maximum burden imposed is 250 hours (1,000 taxpayers x .25 hours). Using a monetization rate of $98.50 (2020 dollars), the total monetized burden for the notification certificate requirement is estimated to be between $2,462.50 (25 hours x $98.50) and $24,625 (250 hours x $98.50).

The time to complete a single exemption certificate to support a tax-free sale, a certificate to support a claim for credit or refund of tax, or a statement of export is estimated to be 30 to 60 minutes, and the IRS expects that between 6,000 and 30,000 taxpayers will submit one of these documents. The estimated minimum burden imposed by these reporting requirements is 3,000 hours (6,000 taxpayers x .5 hour) and the estimated maximum burden imposed is 30,000 hours (30,000 taxpayers x 1 hour). Using a monetization rate of $98.50 (2020 dollars), total monetized burden is estimated to be between $295,500 (3,000 hours x $98.50) and $2,955,000 (30,000 hours x $98.50).

The total estimated burden for these proposed regulations is between 3,025 hours (25 hours + 3,000 hours) and 30,250 hours (250 hours + 30,000 hours). The total monetized burden under these proposed regulations is estimated to be between $297,962.50 ($2,462.50 + $295,500) and $2,979,625 ($24,625 + $2,955,000).

The collections of information contained in this notice of proposed rulemaking have been submitted to OMB for review in accordance with the Paperwork Reduction Act of 1995 (PRA, 44 U.S.C. 3507(d)) under control number 1545-2304. Written comments and recommendations for the proposed information collection can be submitted by visiting https://www.reginfo.gov/public/do/PRAMain. Information collection requests may be found by selecting “Currently Under Review—Open for Public Comments” or by using the search function. Comments on the information collections may also be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collections of information should be received by May 30, 2023. Comments are specifically requested concerning:

Whether the proposed collections of information are necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collections of information;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by OMB.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103 of the Code.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act.

The proposed regulations provide clarity for manufacturers, producers, and importers that sell or use taxable chemicals and for importers that sell or use taxable substances. The proposed regulations provide general rules related to the Superfund chemical taxes, including the attachment of tax, how to calculate the tax, the taxation of chemical mixtures, and supporting information required for credit or refund claims. The proposed regulations provide rules and model certificates for the statutory exceptions and special rules related to the section 4661 tax, such as for methane or butane used otherwise than as a fuel, qualified fertilizer, fuel, and animal feed substances, and tax-free sales for organic taxable chemicals are part of an intermediate hydrocarbon stream. The proposed regulations also provide rules and model certificates for the statutory exceptions to the section 4671 tax for qualified fertilizer, fuel, and animal feed substances. Accordingly, the Treasury Department and the IRS intend that the proposed rules provide clarity for manufactures, producers, and importers and consistent application of the Superfund chemical taxes.

The Treasury Department and the IRS do not have readily available data to assess how many entities may be affected by the proposed regulations. Even if a substantial number of small entities are affected, the economic impact of these regulations on small entities is not likely to be significant. The proposed regulations provide taxpayers with definitional and computational guidance regarding the Superfund chemical taxes as well as rules and model certificates for statutory exceptions to the Superfund chemical taxes. As explained in the PRA section, the record keeping obligations imposed by these proposed regulations are certificates for the statutory exceptions to Superfund chemical taxes and credit and refund claims. It is estimated that between 6,000 and 30,000 taxpayers will prepare one of such certificates annually and it will take no more than one hour to complete.

Accordingly, the Secretary certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities. The Treasury Department and the IRS specifically invite comments from any party, particularly affected small entities, on the accuracy of this certification.

Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

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Name, address, and employer identification number of person receiving certificate

The undersigned taxable chemical registrant (Registrant) hereby certifies under penalties of perjury that Registrant is registered by the Internal Revenue Service (IRS) under activity letter “G” with registration number ________________, and that Registrant’s registration has not been revoked or suspended by the IRS.

Registrant understands that the fraudulent use of this certificate may subject Registrant and all parties making such fraudulent use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

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Signature and date signed

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Printed or typed name of person signing

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Title of person signing

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Name of Registrant

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Employer identification number

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Address of Registrant

(iii) Use of letter of registration as notification certificate prohibited. A copy of the letter of registration issued to a taxable chemical registrant by the IRS is not a notification certificate described in paragraph (g)(5) of this section and cannot be used as a substitute for a notification certificate.

(h) Tax-free sales of taxable chemicals—(1) In general. To make a tax-free sale pursuant to section 4662(b)(2), (5), or (9), the manufacturer, producer, or importer (or, in the case of resales, the reseller) of the taxable chemical must obtain an unexpired exemption certificate from the purchaser, in the form prescribed in paragraph (h)(2) of this section, prior to or at the time of sale, and the manufacturer, producer, importer, or reseller must have no reason to believe that any information in the certificate regarding the use of the taxable chemical is false. If the manufacturer, producer, importer, or reseller does not obtain an unexpired exemption certificate by the time of the sale, or if the manufacturer, producer, importer, or reseller has reason to believe that any information in the certificate regarding the use of the taxable chemical is false, the manufacturer, producer, importer, or reseller is liable for the section 4661 tax. However, if the purchaser subsequently uses the taxable chemical in the manner described in section 4662(b)(2), (5), or (9), the purchaser may file a claim for credit or refund pursuant to section 4662(d) and §52.4662-4.

(2) Exemption certificate—(i) Overview. The exemption certificate consists of a statement that is signed under penalties of perjury by a person with authority to bind the purchaser, is in substantially the same form as the model certificate in paragraph (h)(2)(ii) of this section, and contains all of the information necessary to complete such model certificate. A new certificate must be given if any information in the certificate changes. The certificate expires no later than one year from the effective date specified in the certificate. The certificate may be included as part of any business records normally used to document a sale. The IRS may withdraw the right of a purchaser of taxable chemicals to provide a certificate under this section if the purchaser uses the taxable chemicals to which a certificate relates other than as stated in the certificate.

(ii) Model certificate.

(To support tax-free sales of taxable chemicals under section 4662(b) of the Internal Revenue Code (Code).)

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Name, address, and employer identification number of seller

____________________________(Purchaser) certifies the following under penalties of perjury:

Name of purchaser

The sale(s) to which this certificate applies are for (mark below):

_______ Sold for use by Purchaser as described in section 4662(b)(2) (qualified fertilizer use), section 4662(b)(5) (qualified fuel use), or section 4662(b)(9) (qualified animal feed use) of the Code

_______ Sold for resale by Purchaser for use, or resale for ultimate use, in a qualified use

The taxable chemical to which this certificate applies will be used (mark below):

_______ Qualified fertilizer use

_______ Qualified fuel use

_______ Qualified animal feed use

_________________________________________________________________________________________________________

Name of taxable chemical(s) to be purchased by Purchaser

This certificate applies to:

1. Percentage of purchaser’s purchases _______ between _____________ (effective date) and _____________ (expiration date) (period not to exceed one year after the effective date) under account or order number(s) ________________________; or

2. A single purchase invoice or delivery ticket number _____________________________.

If Purchaser sells or uses the taxable chemical to which this certificate relates for a nonqualified sale or use, Purchaser will be treated as the manufacturer of the taxable chemical and will be liable for the tax imposed by section 4661(a) of the Code.

Purchaser will provide a new certificate to the seller if any information in this certificate changes.

Purchaser understands that Purchaser may be liable for the penalty under section 6701 of the Code (relating to aiding and abetting an understatement of tax liability) if this is an erroneous certification.

Purchaser understands that the fraudulent use of this certificate may subject Purchaser and all parties making any fraudulent use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

__________________________________________

Printed or typed name of person signing

__________________________________________

Title of person signing

__________________________________________

Employer identification number

__________________________________________

Address of Purchaser

__________________________________________

Signature and date signed

(i) Applicability date. This section applies to sales or uses in calendar quarters beginning on or after [date of publication of final regulations in the Federal Register].

Par. 5. Section 52.4662-3 is added to read as follows:

§52.4662-3 Inventory exchanges.

(a) In general. Except as otherwise provided in section 4662(c)(2) of the Internal Revenue Code (Code), in any case in which a manufacturer, producer, or importer of a taxable chemical exchanges such chemical as part of an inventory exchange with another person, the exchange is not treated as a sale, and the other person is treated as the manufacturer, producer, or importer of the chemical, if the requirements in paragraph (b) of this section are satisfied. See section 4662(c)(2). For purposes of section 4662(c), the term inventory exchange means any exchange in which two persons exchange property that is, in the hands of each person, property described in section 1221(a)(1) of the Code. See section 4662(c)(2)(C).

(b) Requirements. The section 4662(c) exception applies only if, at the time of the exchange, all of the following requirements are satisfied:

(1) Both parties are taxable chemical registrants;

(2) The manufacturer, producer, or importer has an unexpired notification certificate from the person receiving the taxable chemical; and

(3) The manufacturer, producer, or importer has no reason to believe that any information in the notification certificate is false.

(c) Notification certificate—(1) Overview. The certificate to be provided by the person receiving the taxable chemical consists of a statement that is signed under penalties of perjury by someone with authority to bind the person receiving the taxable chemical, is in substantially the same form as the model certificate provided in paragraph (c)(2) of this section, and contains all of the information necessary to complete such model certificate. A new certificate must be given if any information in the certificate changes or if the person receiving the taxable chemical informs the manufacturer, producer, or importer that the certificate is no longer accurate. The certificate expires on the earlier of the date the person provides a new certificate or the date the person is notified by the Internal Revenue Service (IRS) that the person’s registration has been revoked or suspended.

(2) Model certificate.

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

Name, address, and employer identification number of person receiving certificate

The undersigned taxable chemical registrant (Registrant) hereby certifies under penalties of perjury that Registrant is registered by the Internal Revenue Service (IRS) under activity letter “G” with registration number ________________, and that Registrant’s registration has not been revoked or suspended by the IRS.

Registrant understands that the fraudulent use of this certificate may subject Registrant and all parties making such fraudulent use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

__________________________________________

Signature and date signed

__________________________________________

Printed or typed name of person signing

__________________________________________

Title of person signing

__________________________________________

Name of Registrant

__________________________________________

Employer identification number

__________________________________________

Address of Registrant

(3) Use of letter of registration as notification certificate prohibited. A copy of the letter of registration issued to a taxable chemical registrant by the IRS is not a notification certificate described in paragraph (c) of this section and cannot be used as a substitute for a notification certificate.

(d) Applicability date. This section applies to sales or uses in calendar quarters beginning on or after [date of publication of final regulations in the Federal Register].

Par. 6. Section 52.4662-4 is added to read as follows:

§52.4662-4 Credit or refund of tax under section 4662(d).

(a) Tax-paid chemicals used to make taxable chemicals—(1) In general. Any section 4661 tax paid by the manufacturer, producer, or importer (initial manufacturer) with respect to a tax-paid chemical that is subsequently used by any person (subsequent manufacturer) in the manufacture or production of any other substance that is a taxable chemical (subsequent taxable chemical) will be allowed as a credit or refund to the subsequent manufacturer in the same manner as if it were an overpayment of the section 4661 tax. See section 4662(d)(1) of the Code. The subsequent manufacturer may file a claim for credit or refund (without interest) for the amount of the overpayment, provided the conditions to allowance set forth in paragraph (a)(3) of this section are satisfied. See paragraph (a)(4) of this section for the supporting information that a subsequent manufacturer must include with a claim for credit or refund. The subsequent manufacturer’s claim for credit or refund of the overpayment cannot exceed the amount of section 4661 tax imposed on the subsequent taxable chemical, or that would have been imposed but for the application of section 4662(b) or (e) of the Code. See section 4662(d)(1).

(2) Allocation required in certain situations. If a subsequent manufacturer uses a tax-paid chemical to manufacture or produce multiple subsequent taxable chemicals, a subsequent taxable chemical and another substance, or one or more subsequent taxable chemicals and one or more other substances, the subsequent manufacturer must allocate the overpayment of the section 4661 tax paid on the tax-paid chemical (first tax) among all subsequent taxable chemicals and other substances manufactured or produced with the tax-paid chemical and apply the allocation to the claim for credit or refund. The subsequent manufacturer must calculate the amount of the first tax to be allocated to each subsequent taxable chemical and other substance by multiplying the amount of the first tax by a fraction, the numerator of which is the weight (in tons) of the portion of the tax-paid chemical the subsequent manufacturer used to manufacture or produce the subsequent taxable chemical or other substance, and the denominator of which is the total weight (in tons) of the tax-paid chemical for which the subsequent manufacturer has a certificate described in paragraph (e) of this section. The subsequent manufacturer’s claim for credit or refund of an overpayment cannot exceed the amount of section 4661 tax imposed on the subsequent taxable chemical to which the claim relates, or that would have been imposed but for the application of section 4662(b) or (e) of the Code. See paragraph (a)(4) of this section for the supporting information regarding the allocation that a subsequent manufacturer must include with a claim for credit or refund. See paragraph (a)(5) of this section for examples that illustrate the allocation rule.

(3) Conditions to allowance of a claim for credit or refund. A claim for credit or refund of section 4661 tax is allowed under section 4662(d)(1) and this paragraph (a) only if:

(i) The first tax was paid to the Internal Revenue Service (IRS) and not credited or refunded;

(ii) After payment of the first tax, the subsequent manufacturer used the tax-paid chemical to manufacture or produce a subsequent taxable chemical, multiple subsequent taxable chemicals, a subsequent taxable chemical and another substance, or one or more subsequent taxable chemicals and one or more other substances;

(iii) The subsequent manufacturer sold or used the subsequent taxable chemical for which a credit or refund is sought and section 4661 tax was imposed (or would have been imposed but for section 4662(b) or (e)) on such sale or use;

(iv) The subsequent manufacturer has filed a timely claim for credit or refund that contains the supporting information required under paragraph (a)(4) of this section; and

(v) The subsequent manufacturer has a certificate, in the form prescribed in paragraph (e) of this section, from the initial manufacturer.

(4) Supporting information required. A subsequent manufacturer’s claim for credit or refund with respect to the subsequent manufacturer’s use of a tax-paid chemical to manufacture or produce a subsequent taxable chemical, multiple subsequent taxable chemicals, a subsequent taxable chemical and another substance, or one or more subsequent taxable chemicals and one or more other substances, must include the following information:

(i) The name of the tax-paid chemical, the total number of tons of the tax-paid chemical purchased from the initial manufacturer, producer, or importer, and the total number of tons of the tax-paid chemical used to manufacture or produce each subsequent taxable chemical or other substance during the period covered by the claim;

(ii) The name of each subsequent taxable chemical or other substance and the total number of tons of each subsequent taxable chemical or other substance so manufactured or produced during the period covered by the claim;

(iii) The amount of section 4661 tax paid with respect to the tax-paid chemical and the amount of section 4661 tax imposed (or that would have been imposed but for section 4662(b) or (e)) on the sale or use of each subsequent taxable chemical manufactured or produced with the tax-paid chemical;

(iv) If allocation is required, the amount of the first tax allocated to each subsequent taxable chemical to which the claim relates, and the allocation calculation; and

(v) The certificate described in paragraph (e) of this section, or a copy of such certificate.

(5) Examples. The following examples illustrate the allocation rule in paragraph (a)(2) of this section.

(i) Example 1—(A) Facts. X, a domestic manufacturer, sells 5 tons of Taxable Chemical 1 to Y, a domestic corporation. Section 4661 tax is imposed on X’s sale of Taxable Chemical 1 at a rate of $8.90 per ton. X pays the section 4661 tax in the amount of $44.50. Y uses 3 tons of Taxable Chemical 1 to produce 4 tons of Taxable Chemical 2. Y uses 2 tons of Taxable Chemical 1 to produce 3 tons of Taxable Chemical 3. Y then sells the 4 tons of Taxable Chemical 2 and 3 tons of Taxable Chemical 3, to Z, a domestic corporation. Section 4661 tax is imposed on Y’s sale of Taxable Chemical 2 at a rate of $9.74 per ton, for a tax of $38.96. Section 4661 tax is imposed on Y’s sale of Taxable Chemical 3 at a rate of $5.40 per ton, for a tax of $16.20. The total amount of section 4661 tax imposed on Y’s sales of Taxable Chemical 2 and Taxable Chemical 3 is $55.16. Y files a claim for refund of the section 4661 tax X paid with respect to Taxable Chemical 1 (first tax).

(B) Analysis. Y must allocate the first tax between Taxable Chemical 2 and Taxable Chemical 3 as follows: 3/5 ($26.70) to Taxable Chemical 2, and 2/5 ($17.80) to Taxable Chemical 3. The section 4661 tax imposed on Y’s sale of Taxable Chemical 2 to Z ($38.96), exceeds the amount of the first tax allocated to Taxable Chemical 2 ($26.70). Therefore, Y’s claim for refund with respect to Taxable Chemical 2 is limited to $26.70, the amount of the first tax allocated to Taxable Chemical 2. The section 4661 tax imposed on Y’s sale of Taxable Chemical 3 to Z ($16.20), is less than the amount of the first tax allocated to Taxable Chemical 3 ($17.80). Therefore, Y’s claim for refund with respect to Taxable Chemical 3 is limited to $16.20, the amount of section 4661 tax imposed on Taxable Chemical 3. Y’s total claim for refund is limited to $42.90 ($26.70 + $16.20) due to the required allocation.

(ii) Example 2—(A) Facts. X, a domestic manufacturer, sells 3 tons of Taxable Chemical 1 to Y, a domestic corporation. Section 4661 tax is imposed on X’s sale of Taxable Chemical 1 at a rate of $9.74 per ton. X pays the tax in the amount of $29.22. Y uses 2 tons of Taxable Chemical 1 to produce 3 tons of Taxable Chemical 2. Y uses 1 ton of Taxable Chemical 1 to produce 2 tons of another substance. Y then sells 3 tons of Taxable Chemical 2 to Z, a domestic corporation. Tax is imposed on Y’s sale of Taxable Chemical 2 at a rate of $5.40 per ton, for a tax of $16.20. Y files a claim for refund of the first tax paid with respect to Taxable Chemical 1 (first tax).

(B) Analysis. Y must allocate the first tax between Taxable Chemical 2 and the other substance as follows: 2/3 ($19.48) to Taxable Chemical 2, and 1/3 ($9.74) to the other substance. Y may claim a refund of the first tax in the amount of $16.20 (the full amount of tax imposed on Y’s sale of Taxable Chemical 2 to Z), because the tax imposed on Taxable Chemical 2 does not exceed the amount of the first tax that was allocated to Taxable Chemical 2.

(b) Use as a fertilizer—(1) In general. Any section 4661 tax paid that exceeds the amount of section 4661 tax determined with regard to section 4662(b)(2) with respect to nitric acid, sulfuric acid, ammonia, or methane used to produce ammonia (each, a fertilizer chemical) that any person uses as a qualified fertilizer substance will be allowed as a credit or refund (without interest) to the person using the fertilizer chemical as a qualified fertilizer substance in the same manner as if it were an overpayment of section 4661 tax. See section 4662(d)(2). Such person may file a claim for credit or refund of the amount of the overpayment, provided the conditions to allowance set forth in paragraph (b)(2) of this section are satisfied. See paragraph (b)(3) of this section for the supporting information that must be included with a claim for credit or refund pursuant to section 4662(d)(2).

(2) Conditions to allowance of a claim for credit or refund. A claim for credit or refund of section 4661 tax with respect to a tax-paid fertilizer chemical that is used as a qualified fertilizer substance is allowed under section 4662(d)(2) and this section only if:

(i) A section 4661 tax with respect to the fertilizer chemical was paid to the IRS and not credited or refunded;

(ii) After payment of the section 4661 tax, a person used the fertilizer chemical as a qualified fertilizer substance;

(iii) The person using the fertilizer chemical as a qualified fertilizer substance has filed a timely claim for credit or refund that includes the information required under paragraph (b)(3) of this section; and

(iv) The person using the fertilizer chemical as a qualified fertilizer substance has a certificate, in the form prescribed in paragraph (e) of this section, from the person that paid the section 4661 tax.

(3) Supporting information required. Each claim for credit or refund with respect to a tax-paid fertilizer chemical used as a qualified fertilizer substance must include the following information:

(i) The name of the tax-paid fertilizer chemical to which the claim relates and the total number of tons of the tax-paid fertilizer chemical used as a qualified fertilizer substance during the period covered by the claim;

(ii) The manner in which the claimant used the qualified fertilizer substance;

(iii) The amount of section 4661 tax paid with respect to the tax-paid fertilizer chemical; and

(iv) The certificate described in paragraph (e) of this section, or a copy of such certificate, that relates to the tax-paid fertilizer chemical for which the claim is being made.

(c) Use as qualified fuel—(1) In general. Any section 4661 tax paid that exceeds the amount of section 4661 tax determined with regard to section 4662(b)(5) with respect to acetylene, benzene, butylene, butadiene, ethylene, naphthalene, propylene, toluene, or xylene (collectively, fuel chemicals, or individually, a fuel chemical) that any person uses as a qualified fuel substance will be allowed as a credit or refund (without interest) to the person using the fuel chemical as a qualified fuel substance in the same manner as if it were an overpayment of section 4661 tax. See section 4662(d)(3). Such person may file a claim for credit or refund of the amount of the overpayment, provided the conditions to allowance set forth in paragraph (c)(2) of this section are satisfied. See paragraph (c)(3) of this section for the supporting information that must be included in a claim for credit or refund pursuant to section 4662(d)(3).

(2) Conditions to allowance of a claim for credit or refund. A claim for credit or refund of section 4661 tax with respect to a tax-paid fuel chemical that is used as a qualified fuel substance is allowed under section 4662(d)(3) and this section only if:

(i) A section 4661 tax with respect to the fuel chemical was paid to the IRS and not credited or refunded;

(ii) After payment of the section 4661 tax, a person used the fuel chemical as a qualified fuel substance;

(iii) The person using the fuel chemical as a qualified fuel substance has filed a timely claim for credit or refund that includes the supporting information required under paragraph (c)(3) of this section; and

(iv) The person using the fuel chemical as a qualified fuel substance has a certificate, in the form prescribed in paragraph (e) of this section, from the person that paid the section 4661 tax.

(3) Supporting information required. Each claim for credit or refund with respect to a tax-paid fuel chemical used as a qualified fuel substance must include the following information:

(i) The name of the fuel chemical to which the claim relates and the total number of tons of the tax-paid fuel chemical used as a qualified fuel substance during the period covered by the claim;

(ii) The manner in which the claimant used the qualified fuel substance;

(iii) The amount of section 4661 tax paid with respect to the fuel chemical; and

(iv) The certificate described in paragraph (e) of this section, or a copy of such certificate, that relates to the tax-paid fuel chemical for which the claim is being made.

(d) Use in the production of animal feed—(1) In general. Any section 4661 tax paid that exceeds the amount of tax determined with regard to section 4662(b)(9) with respect to nitric acid, sulfuric acid, ammonia, or methane used to produce ammonia (each, an animal feed chemical) that any person uses as a qualified animal feed substance will be allowed as a credit or refund (without interest) to the person using the animal feed chemical as a qualified animal feed substance in the same manner as if it were an overpayment of section 4661 tax. See section 4662(d)(4). Such person may file a claim for credit or refund of the amount of the overpayment, provided the conditions to allowance set forth in paragraph (d)(2) of this section are satisfied. See paragraph (d)(3) of this section for the supporting information that must be included in a claim for credit or refund pursuant to section 4662(d)(4).

(2) Conditions to allowance of a claim for credit or refund. A claim for credit or refund of section 4661 tax with respect to a tax-paid animal feed chemical that is used as a qualified animal feed substance is allowed under section 4662(d)(4) and this section only if:

(i) A section 4661 tax with respect to the animal feed chemical was paid to the IRS and not credited or refunded;

(ii) After payment of the section 4661 tax, a person used the animal feed chemical as a qualified animal feed substance;

(iii) The person using the animal feed chemical as a qualified animal feed substance has filed a timely claim for credit or refund that includes the supporting information required under paragraph (d)(3) of this section; and

(iv) The person using the animal feed chemical as a qualified animal feed substance has a certificate, in the form prescribed in paragraph (e) of this section, from the person that paid the section 4661 tax.

(3) Supporting information required. Each claim for credit or refund with respect to a tax-paid animal feed chemical used as a qualified animal feed substance must include the following information:

(i) The name of the animal feed chemical to which the claim relates and the total number of tons of the tax-paid animal feed chemical used as a qualified animal feed substance during the period covered by the claim;

(ii) The manner in which the claimant used the qualified animal feed substance;

(iii) The amount of section 4661 tax paid with respect to the animal feed chemical; and

(iv) A certificate described in paragraph (e) of this section, or a copy of such certificate, that relates to the tax-paid animal feed chemical for which the claim is being made.

(e) Certificate—(1) Overview. The certificate to be provided with any claim for credit or refund under paragraphs (a) through (d) of this section consists of a statement that is signed under penalties of perjury by a person with authority to bind the person that paid the section 4661 tax, is in substantially the same form as the model certificate provided in paragraph (e)(2) of this section, and contains all of the information necessary to complete the model certificate.

(2) Model certificate.

(To support claims for credit or refund under section 4662(d) of the Internal Revenue Code (Code).)

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

Name, address, and employer identification number of person that paid the tax imposed by section 4661 of the Code (section 4661 tax)

The undersigned taxpayer hereby certifies the following under penalties of perjury:

The undersigned taxpayer reported and paid the section 4661 tax on the following taxable chemicals (include lot numbers (if applicable), quantities (in tons), and dates of sale or use):

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

Amount of section 4661 tax the undersigned taxpayer paid with respect to the taxable chemicals listed above: _________________________________________________________________

Tax quarter(s) during which tax payment(s) was made: ____________________________________________________________________________

The undersigned taxpayer has not received a credit or a refund, and will not claim a credit or a refund, with regard to the tax paid on the taxable chemical(s) to which this certificate relates.

The undersigned taxpayer understands that it may be liable for the penalty under section 6701 of the Code (relating to aiding and abetting an understatement of tax liability) if this is an erroneous certification.

The undersigned taxpayer understands that the fraudulent use of this certificate may subject the undersigned taxpayer and all parties making any fraudulent use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

__________________________________________

Signature and date signed

__________________________________________

Printed or typed name of person signing

__________________________________________

Title of person signing

(f) Applicability date. This section applies to sales or uses in calendar quarters beginning on or after the [date of publication of final regulations in the Federal Register].

Par. 7. Section 52.4662-5 is added to read as follows:

§52.4662-5 Exports.

(a) Overview. Section 4662(e) of the Internal Revenue Code (Code) provides rules regarding taxable chemicals that are exported. Paragraph (b) of this section provides the circumstances under which a manufacturer or producer may make a tax-free sale for export. Paragraph (c) of this section provides the circumstances under which a credit or refund (without interest) of the section 4661 tax is allowed to the person that paid the section 4661 tax. Paragraph (d) of this section provides the circumstances under which a credit or refund (without interest) of the section 4661 tax is allowed to the exporter.

(b) Tax-free sales for export—(1) In general. A manufacturer or producer of a taxable chemical may sell a taxable chemical tax free under section 4662(e)(1) only if the person that purchases the taxable chemical from the manufacturer or producer (first purchaser) intends to export the taxable chemical or resell it to a second purchaser that intends to export the taxable chemical. A manufacturer or producer may not sell a taxable chemical tax free to a first purchaser for resale to a second purchaser if the second purchaser does not intend to export the taxable chemical itself but instead plans to sell it to a third purchaser that will resell the taxable chemical or export it. See paragraph (b)(5)(i) of this section for the proof required when the manufacturer or producer is the exporter. See paragraph (b)(5)(ii) of this section for the proof required when the manufacturer or producer is not the exporter.

(2) Exported taxable chemical returned to the United States. If a taxable chemical is sold tax free by the manufacturer or producer pursuant to section 4662(e)(1) and paragraph (b) of this section and the taxable chemical is subsequently returned to the United States, the importer of the taxable chemical is liable for the section 4661 tax when the importer sells or uses the taxable chemical.

(3) Sale or resale to a purchaser located outside the United States. To make a tax-free sale of a taxable chemical for export to a first purchaser that is located outside the United States, the manufacturer or producer must obtain from the first purchaser, at the earlier of the time title to the taxable chemical passes to the first purchaser or the time of shipment, either:

(i) A written order or contract of sale that states the manufacturer or producer will ship the taxable chemical to a location outside the United States; or

(ii) Where shipment is to be made to a location within the United States, a statement from the first purchaser showing:

(A) That the first purchaser is purchasing the taxable chemical to fill existing or future orders for shipment to a location outside the United States, or for resale to a second purchaser that is engaged in the business of exporting and that will export the taxable chemical; and

(B) That such taxable chemical will be shipped to a location outside the United States prior to any resale except for export.

(4) Cessation of exemption. The exemption provided in section 4662(e)(1) and paragraph (b) of this section will cease to apply on the first day following the close of the 6-month period that begins on the date the manufacturer or producer sold the taxable chemical to the first purchaser, or the date the manufacturer or producer shipped the taxable chemical to the first purchaser, whichever is earlier, unless the manufacturer or producer receives proof of export, in the form prescribed by paragraph (b)(5) of this section, within such 6-month period. If, on the first day following the close of such 6-month period, the manufacturer or producer has not received proof of export, in the form prescribed by paragraph (b)(5) of this section, the manufacturer or producer is liable for the tax and tax attaches at that time.

(5) Proof of export—(i) Proof required when the manufacturer or producer is the exporter. The following constitutes proof of export when the manufacturer or producer is the exporter:

(A) A copy of the export bill of lading issued by the delivering carrier;

(B) A certificate by the agent or representative of the export carrier showing actual exportation of the taxable chemical;

(C) A certificate of landing signed by a customs officer of the foreign country to which the taxable chemical is exported;

(D) Where the foreign country has no customs administration, a statement of the foreign consignee showing receipt of the taxable chemical; or

(E) Where a department or agency of the United States government is unable to furnish any one of the foregoing types of proof of exportation, a statement or certification on department or agency letterhead, executed by an authorized person, that the taxable chemicals have been exported.

(ii) Statement of export required when manufacturer or producer is not the exporter—(A) In general. If the manufacturer or producer of a taxable chemical is not the exporter of the taxable chemical, the manufacturer or producer must have in its possession a statement from the first purchaser stating that the taxable chemical was, in fact, exported by the first purchaser, or was resold to a second purchaser that exported the taxable chemical. The manufacturer or producer must receive such statement of export no later than the close of the 6-month period that begins on the earlier of the date the manufacturer or producer sold the taxable chemical to the first purchaser, or the date the manufacturer or producer shipped the taxable chemical to the first purchaser. The statement of export consists of a statement that is signed under penalties of perjury by a person with authority to bind the first purchaser, is in substantially the same form as the model statement of export in paragraph (b)(5)(ii)(B) of this section, and contains all the information necessary to complete the model statement. The statement of export must be included as part of the manufacturer or producer’s business records.

(B) Model statement of export.

(To support tax-free sales of taxable chemicals under section 4662(e)(1)(B) of the Internal Revenue Code (Code).)

_________________________(Purchaser) certifies the following under penalties of perjury:

Name of Purchaser

Name of taxable chemical(s) purchased by Purchaser: ______________________________________________________________

_________________________________________________________________________________________________________

Purchaser purchased the taxable chemical(s) specified above tax free on _________________ (purchase date). The taxable chemicals were thereafter exported.

Purchaser has in its possession proof of export with respect to the taxable chemicals identified in this statement. The proof of export is: _______________________________________________________________________________________________________

_________________________________________________________________________________________________________

Purchaser will retain the business records needed to document the export of the taxable chemical(s) to which this statement applies and will make such records available to the Internal Revenue Service.

Purchaser has not previously executed a statement with respect to the taxable chemical(s) identified in this certificate.

Purchaser understands that Purchaser may be liable for the penalty under section 6701 of the Code (relating to aiding and abetting an understatement of tax liability) if this is an erroneous certification.

Purchaser understands that the fraudulent use of this statement may subject Purchaser and all parties making any fraudulent use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

__________________________________________

Printed or typed name of person signing

__________________________________________

Title of person signing

__________________________________________

Employer identification number

__________________________________________

Address of Purchaser

__________________________________________

Signature and date signed

(c) Credit or refund—(1) In general. The person that paid the section 4661 tax with respect to a taxable chemical is allowed a credit or refund (without interest) if:

(i) Such chemical was exported by any person; or

(ii) Such chemical was used as material in the manufacture or production of a substance that was exported by any person and, at the time of export, was a taxable substance (as defined in section 4672(a) of the Code and §52.4672-1(b)(8)). See section 4662(e)(2)(A).

(2) Conditions to allowance of claim for credit or refund. A claim for credit or refund of section 4661 tax with respect to a tax-paid chemical that is exported (or with respect to a tax-paid chemical that is used as material in the manufacture or production of a substance that is a taxable substance at the time of export) is allowed under section 4662(e)(2) and paragraph (c) of this section only if the person that paid the section 4661 tax establishes that:

(i) The person has repaid or agreed to repay the amount of the section 4661 tax to the person that exported the tax-paid chemical (or the taxable substance manufactured or produced with the tax-paid chemical); or

(ii) The person has obtained the written consent of the exporter to the allowance of the credit or the making of the refund; and

(iii) The person provides the supporting information described in paragraph (c)(3) of this section.

(3) Supporting information required. Each claim for credit or refund with respect to a tax-paid chemical that is exported (or with respect to a tax-paid chemical that is used as material in the manufacture or production of a substance that is a taxable substance at the time of export) must include the following information:

(i) The name of the tax-paid chemical to which the claim relates and the total number of tons of the tax-paid chemical exported during the period covered by the claim (in the case of a tax-paid chemical used to manufacture or produce a taxable substance, the claim must also include the name of each taxable substance and the number of tons of each taxable substance exported during the period covered by the claim);

(ii) The amount of section 4661 tax paid with respect to the tax-paid chemical (in the case of a taxable substance, the amount of section 4661 tax paid with respect to each tax-paid chemical used in the manufacture or production of the substance); and

(iii) Proof of export of the taxable chemical (or the taxable substance) in the form prescribed by paragraph (b)(5) of this section.

(d) Credit or refund directly to exporter—(1) In general. The exporter is allowed a credit or refund (without interest), provided the conditions to allowance in paragraph (d)(2) of this section are satisfied. See section 4662(e)(3).

(2) Conditions to allowance. Any section 4661 tax paid on a taxable chemical (or on any taxable chemical used as material in the manufacture or production of a taxable substance) may be credited or refunded (without interest) to the exporter pursuant to section 4662(e)(3) and paragraph (d) of this section only if:

(i) The person that paid the section 4661 tax waives the right to claim a credit or refund of the section 4661 tax; and

(ii) The exporter provides the supporting information described in paragraph (d)(3) of this section.

(3) Supporting information required. Each claim for credit or refund by the exporter must include the following information:

(i) The name of the tax-paid chemical to which the claim relates and the total number of tons of the tax-paid chemical exported during the period covered by the claim (or in the case of a taxable substance, the name of the taxable substance to which the claim relates, the name of each tax-paid chemical used as material in the manufacture or production of the taxable substance, and the total number of tons of each tax-paid chemical used as material in the manufacture or production of the taxable substance that was exported during the period covered by the claim);

(ii) Proof of export of the tax-paid chemical (or the taxable substance) in the form prescribed by paragraph (b)(5) of this section; and

(iii) A statement, signed under penalties of perjury by the person that paid the section 4661 tax, providing:

(A) That the person that paid the tax waives the right to claim a credit or refund of the section 4661 tax;

(B) The amount of section 4661 tax the person paid on the sale of the taxable chemical (or on the sale or use of each taxable chemical used to manufacture or produce the taxable substance); and

(C) The date the person paid the section 4661 tax.

(e) Applicability date. This section applies to sales or uses in calendar quarters beginning on or after [date of publication of final regulations in the Federal Register].

Par. 8. Section 52.4671-1 is added to read as follows:

§52.4671-1 Imposition of tax.

(a) In general. Section 4671(a) of the Internal Revenue Code (Code) imposes an excise tax on any taxable substance sold or used by the importer of the taxable substance.

(b) Person liable for tax. The importer of a taxable substance is the person liable for the section 4671 tax.

(c) Attachment of tax. The section 4671 tax attaches at the time the importer first sells or uses the taxable substance.

(d) Procedural rules. Part 40 of this chapter provides rules related to filing excise tax returns, making semimonthly deposits of excise tax, making payments of excise tax, and other procedural rules. See §§52.0-1 and 40.0-1(a) of this chapter. Each business unit that has, or is required to have, a separate employer identification number is treated as a separate person for purposes of filing excise tax returns, making semimonthly deposits of excise tax, and making payments of excise tax. See §40.0-1(d) of this chapter.

(e) Amount of tax—(1) In general. Except as provided in paragraph (e)(2) of this section, the amount of section 4671 tax with respect to any taxable substance is the amount of section 4661 tax that would have been imposed on the taxable chemicals used as materials in the manufacture or production of the taxable substance if the taxable chemicals had been sold in the United States for use in the manufacture or production of the taxable substance. See section 4671(b)(1).

(2) Special rules. If the importer does not furnish sufficient information to the Secretary of the Treasury or her delegate (Secretary) to determine the amount of section 4671 tax imposed on any taxable substance, the amount of section 4671 tax is 10 percent of the appraised value of the taxable substance at the time the substance was entered into the United States for consumption, use, or warehousing. See section 4671(b)(2). Alternatively, the Secretary may prescribe a tax rate for any taxable substance in lieu of the amount prescribed in section 4671(b)(2). The tax rate prescribed by the Secretary equals the amount of section 4671 tax that would have been imposed if the taxable substance were produced using the predominant method of production of such substance using a stoichiometric material consumption equation that assumes a 100-percent yield. See section 4671(b)(3). Importers of taxable substances are not required to use the rate or rates prescribed by the Secretary and may instead calculate the amount of section 4671 tax pursuant to section 4671(b)(1) and §52.4671-1(e)(1).

(3) Example. An importer sells a substance that is a taxable substance listed in section 4672(a)(3). The taxable chemical, acetylene, constitutes, by weight, 19 percent of the materials used to produce the taxable substance. Section 4671 tax attaches at the time of the importer’s sale of the taxable substance. The Secretary has prescribed a tax rate for the taxable substance pursuant to section 4671(b)(3). The importer may calculate the amount of section 4671 tax pursuant to section 4671(b)(1), or use the rate prescribed by the Secretary to calculate the amount of section 4671 tax imposed on the importer’s sale of the taxable substance.

(f) Exemption for substances taxed under sections 4611 and 4661. No section 4671 tax is imposed on the importer’s sale or use of any taxable substance if tax is imposed on such sale or use under section 4611 or 4661 of the Code. See section 4671(c).

(g) Applicability date. This section applies to calendar quarters beginning on or after [date of publication of final regulations in the Federal Register].

Par. 9. Section 52.4671-2 is added to read as follows:

§52.4671-2 Certain fertilizer, fuel, and animal feed uses.

(a) In general. Section 4671(d) of the Internal Revenue Code (Code) provides that rules similar to section 4662(b)(2) of the Code (pertaining to fertilizer), section 4662(b)(5) (pertaining to motor fuel), and section 4662(b)(9) (pertaining to animal feed) apply with respect to taxable substances used or sold for use as described in section 4662(b)(2), (5), and (9).

(b) Tax-free sales—(1) In general. No section 4671 tax is imposed on a taxable substance used or sold for use as described in section 4662(b)(2), (5), or (9), if all taxable chemicals used as materials in the manufacture or production of such substance would have been exempt under section 4662(b)(2), (5), or (9) if such taxable chemicals had been sold in the United States for use in the manufacture or production of the taxable substance. To make a tax-free sale of a taxable substance pursuant to section 4671(d)(1), the importer (or, in the case of resales, the reseller) of the taxable substance must obtain an unexpired exemption certificate from the purchaser, in the form prescribed in paragraph (b)(3) of this section, prior to or at the time of sale, and the importer or reseller must have no reason to believe that any information in the certificate regarding the use of the taxable substance is false. If the importer or reseller does not obtain an unexpired exemption certificate by the time of the sale, or if the importer or reseller has reason to believe that any information in the certificate regarding the use of the substance is false, the importer or reseller is liable for the full amount of the section 4671 tax. However, if the purchaser subsequently uses the taxable substance as described in section 4662(b)(2), (5), or (9), the purchaser may file a claim for credit or refund pursuant to section 4671(d)(2) and paragraph (c) of this section.

(2) Tax-free sales not available in certain situations. The provisions of paragraph (b)(1) of this section apply only if all taxable chemicals used as materials in the manufacture or production of a taxable substance would have been exempt under section 4662(b)(2), (5), or (9) if such taxable chemicals had been sold in the United States for use in the manufacture or production of the taxable substance. Section 4671 tax is imposed on a taxable substance used or sold for use if the taxable chemicals used as materials in the manufacture or production of such taxable substance consist of one or more taxable chemicals that would have been exempt under section 4662(b)(2), (5), or (9), and one or more taxable chemicals that would not have been exempt under section 4662(b)(2), (5), or (9). If the purchaser subsequently uses the taxable substance as described in section 4662(b)(2), (5), or (9), the purchaser may file a claim for credit or refund of the section 4671 tax paid on the taxable chemicals that would have been exempt under section 4662(b)(2), (5), or (9) pursuant to section 4671(d)(2) and paragraph (c) of this section and were used as materials in the manufacture or production of the taxable substance.

(3) Exemption certificate—(i) Overview. The exemption certificate consists of a statement that is signed under penalties of perjury by a person with authority to bind the purchaser, is in substantially the same form as the model certificate in paragraph (b)(3)(ii) of this section, and contains all of the information necessary to complete such model certificate. A new certificate must be given if any information in the certificate changes. The certificate expires no later than one year from the effective date specified in the certificate. The certificate may be included as part of any business records normally used to document a sale. The Internal Revenue Service (IRS) may withdraw the right of a purchaser of a taxable substance to provide a certificate under this section if the purchaser uses the taxable substance to which a certificate relates other than as stated in the certificate.

(ii) Model certificate.

(To support tax-free sales of taxable substances under section 4671(d)(1) of the Internal Revenue Code (Code).)

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

Name, address, and employer identification number of seller

____________________________(Purchaser) certifies the following under penalties of perjury:

Name of Purchaser

The sale(s) to which this certificate applies are for (mark below):

_______ Sold for use by Purchaser as described in section 4662(b)(2) (qualified fertilizer use), section 4662(b)(5) (qualified fuel use), or section 4662(b)(9) (qualified animal feed use) of the Code

_______ Sold for resale by Purchaser for use, or resale for ultimate use, in a qualified use

The taxable substance(s) to which this certificate applies will be used (mark below):

________ Qualified fertilizer use

________ Qualified fuel use

________ Qualified animal feed use

_________________________________________________________________________________________________________

Name of taxable substance(s) to be purchased by Purchaser

This certificate applies to:

1. Percentage of Purchaser’s purchases _________________ between _______________ (effective date) and ____________ (expiration date) (period not to exceed one year after the effective date) under account or order number(s) ____________________________; or

2. A single purchase invoice or delivery ticket number _________________________.

If Purchaser sells or uses the taxable substance to which this certificate relates for a nonqualified sale or use, Purchaser will be treated as the importer of the taxable substance and will be liable for the tax imposed by section 4671.

Purchaser will provide a new certificate to the seller if any information in this certificate changes.

Purchaser understands that Purchaser may be liable for the penalty under section 6701 of the Code (relating to aiding and abetting an understatement of tax liability) if this is an erroneous certification.

Purchaser understands that the fraudulent use of this certificate may subject Purchaser and all parties making any fraudulent use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

__________________________________________

Printed or typed name of person signing

__________________________________________

Title of person signing

__________________________________________

Employer identification number

__________________________________________

Address of Purchaser

__________________________________________

Signature and date signed

(c) Credits and refunds—(1) In general. If any section 4671 tax was paid with respect to a taxable substance used or sold for use as described in section 4662(b)(2), (5), or (9), the portion of the tax attributable to any taxable chemical used as material in the manufacture or production of such substance that would have been exempt under section 4662(b)(2), (5), or (9) if the taxable chemical had been sold in the United States will be allowed as a credit or refund (without interest) to the person using the substance in the same manner as if it were an overpayment of section 4671 tax. See sections 4671(d)(2) and 4662(d). Such person may file a claim for credit or refund of the amount of the overpayment, provided the conditions to allowance set forth in paragraph (c)(2) of this section are satisfied. See paragraph (c)(3) of this section for the supporting information that must be included in a claim for credit or refund pursuant to section 4671(d)(2).

(2) Conditions to allowance of a claim for credit or refund. A claim for credit or refund of section 4671 tax is allowed under section 4671(d)(2) and this section only if:

(i) A section 4671 tax was paid to the Internal Revenue Service and not credited or refunded;

(ii) After the imposition of section 4671 tax, a person used the taxable substance as described in section 4662(b)(2), (5), or (9);

(iii) The person using the taxable substance has filed a timely claim for credit or refund that includes the information required under paragraph (c)(3) of this section; and

(iv) The person using the taxable substance has a certificate, in the form prescribed in paragraph (c)(4) of this section, from the person that paid the section 4671 tax. The claimant must have a separate certificate for each taxable substance to which the claim relates.

(3) Supporting information required. Each claim for credit or refund must include the following information:

(i) The name of the taxable substance to which the claim relates and the total number of tons of the taxable substance used as described in section 4662(b)(2), (5), or (9) during the period covered by the claim;

(ii) The name of any taxable chemicals used as material in the manufacture or production of the taxable substance that would have been exempt under section 4662(b)(2), (5), or (9) if the taxable chemicals had been sold in the United States;

(iii) The type of qualified use (fertilizer, fuel, or animal feed);

(iv) The total amount of section 4671 tax paid on the taxable substance under section 4671(a);

(v) If the amount of section 4671 tax was calculated pursuant to section 4671(b)(1) and §52.4671-1(e)(1), the rate of tax and conversion factors for any taxable chemicals used as material in the manufacture or production of the taxable substance that would have been exempt under section 4662(b)(2), (5), or (9) if the taxable chemicals had been sold in the United States; and

(vi) A certificate described in paragraph (c)(4) of this section, or a copy of such certificate, that relates to the taxable substance for which the claim is being made.

(4) Certificate—(i) Overview. The certificate to be provided with regard to claims for credit or refund under this section consists of a statement that is signed under penalties of perjury by a person with authority to bind the person that paid the section 4671 tax, is in substantially the same form as the model certificate provided in paragraph (c)(4)(ii) of this section, and contains all of the information necessary to complete the model certificate.

(ii) Model certificate.

(To support claims for credit or refund under section 4671(d)(2) of the Internal Revenue Code (Code).)

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

Name, address, and employer identification number of person that paid the tax imposed by section 4671 of the Code (section 4671 tax)

The undersigned taxpayer hereby certifies the following under penalties of perjury:

The undersigned taxpayer reported and paid the section 4671 tax on the following taxable substance (include lot numbers (if applicable) and the date(s) of sale or use): ___________________________________________________________________________

Number of tons of the taxable substance on which tax was paid:________________________

Name of any taxable chemicals used as material in the manufacture or production of the taxable substance:

_________________________________________________________________________________________________________

_________________________________________________________________________________________________________

Total amount of section 4671 tax the undersigned taxpayer paid with respect to the taxable substance listed above: ____________________________________________________________________________

Rate of tax for the taxable substance listed above (complete only if the amount of tax was calculated pursuant to section 4671(b)(1)): ____________________________________________________________________________

Conversion factor for each taxable chemical listed above (complete only if the amount of tax was calculated pursuant to section 4671(b)(1)): ____________________________________________________________________________

Tax quarter(s) during which tax payment was made: ____________________________________________________________________________

The undersigned taxpayer has not received a credit or a refund, and will not claim a credit or a refund, with regard to the tax paid on the taxable substance to which this certificate relates.

The undersigned taxpayer understands that it may be liable for the penalty under section 6701 of the Code (relating to aiding and abetting an understatement of tax liability) if this is an erroneous certification.

The undersigned taxpayer understands that the fraudulent use of this certificate may subject the undersigned taxpayer and all parties making any fraudulent use of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

__________________________________________

Signature and date signed

__________________________________________

Printed or typed name of person signing

__________________________________________

Title of person signing

(d) Applicability date. This section applies to calendar quarters beginning on or after [date of publication of final regulations in the Federal Register].

Par. 10. Section 52.4672-1 is added to read as follows:

§52.4672-1 Definitions.

(a) Overview. This section provides definitions for purposes of sections 4671 and 4672 of the Internal Revenue Code (Code), §§52.4671-1 and 52.4671-2, this section, and §52.4672-2.

(b) Definitions—(1) Conversion factor. The term conversion factor means the ratio of the weight of an individual taxable chemical used in the production of a substance to the total weight of the substance.

(2) Entry for consumption, use, or warehousing. The term entry for consumption, use, or warehousing has the meaning given such term by §52.4662-1(c)(2).

(3) Importer—(i) In general. The term importer means the person entering the taxable substance for consumption, use, or warehousing. See section 4662(a)(3). If the person entering the taxable substance for consumption, use, or warehousing is merely acting as an agent or a customs broker for another person, then the agent or customs broker is not the importer and the importer is the first person in the United States to sell or use the taxable substance after entry of the taxable substance for consumption, use, or warehousing.

(ii) Drop ship businesses. If a drop ship business in the United States purchases or otherwise arranges for a person outside the United States to ship a taxable substance directly to a purchaser in the United States, the drop ship business is the importer of the taxable substance. If a drop ship business outside the United States purchases or otherwise arranges for a person outside the United States to ship a taxable substance directly to a purchaser in the United States, the purchaser in the United States is the importer of the taxable substance. With regard to any sale of a taxable substance, the term drop ship business means a person that sells the taxable substance or arranges for purchasers to purchase the taxable substance, and uses a third party to fill orders by shipping the taxable substance directly to the purchaser. The determination of whether a person is a drop ship business is made on a sale-by-sale basis.

(4) Predominant method of production. The term predominant method of production means the method used to produce the greatest number of tons of a particular substance worldwide, relative to the total number of tons of the substance produced worldwide.

(5) Sale. The term sale means the transfer of title or substantial incidents of ownership (whether or not delivery to, or payment by, the purchaser has been made) in a taxable substance for a consideration, which may include, but is not limited to, money, services, or property.

(6) Section 4671 tax. The term section 4671 tax means the excise tax imposed by section 4671(a) of the Code on any taxable substance sold or used by the importer of the taxable substance.

(7) Taxable chemical. The term taxable chemical has the meaning given such term by section 4662(a)(1) of the Code and section §52.4662-1(b).

(8) Taxable substance. The term taxable substance means any substance, which at the time of sale or use by the importer, is listed in section 4672(a)(3) or has been added to the list of taxable substances pursuant to section 4672(a)(2) or (4). The term does not include any substance that the Secretary of the Treasury or her delegate has removed from the list of taxable substances through the process described in section 4672(a)(2) or (4). A substance that satisfies the weight or value test, but that is not listed in section 4672(a)(3) and has not been added to the list of taxable substances pursuant to section 4672(a)(2) or (4), is not a taxable substance.

(9) Use. A taxable substance is used when it is consumed, when it functions as a catalyst, when its chemical composition changes, when it is used in the manufacture or production of another substance (including by mixing or combining the taxable substance with other substances), or when it is put into service in a trade or business for the production of income. The loss or destruction of a taxable substance through spillage, fire, natural degradation, or other casualty is not a use. The mere manufacture or production of a taxable substance is not a use of that taxable substance.

(10) United States. The term United States has the meaning given such term by section 4612(a)(4) of the Code. See sections 4672(b)(2) and 4662(a)(2).

(11) Weight or value test. The term weight or value test means the test under section 4672(a)(2)(B) for determining whether taxable chemicals constitute more than 20 percent of the weight or more than 20 percent of the value of the materials used to produce a substance, based on the predominant method of production.

(c) Applicability date. This section applies to calendar quarters beginning on or after [date of publication of final regulations in the Federal Register].

Par. 11. Section 52.4672-2 is added to read as follows:

§52.4672-2 List of taxable substances.

(a) Overview. Section 4672(a)(3) of the Internal Revenue Code (Code) provides the initial list of taxable substances. Section 4672(a)(2) and (4) provides mechanisms by which substances may be added to or removed from the list. Therefore, the list of taxable substances is subject to change. The Internal Revenue Service (IRS) will maintain the current list of taxable substances at https://www.irs.gov/businesses/small-businesses-self-employed/superfund-chemical-excise-taxes.

(b) Requests to modify the list of taxable substances—(1) In general. An importer or exporter of any substance, or a person other than an importer or exporter (interested person), may petition to add a substance to or remove a substance from the list of taxable substances. See section 4672(a)(2). The procedures governing the exclusive process by which importers, exporters, and interested persons may request modifications to the list of taxable substances are provided in guidance published in the Internal Revenue Bulletin. See §601.601(d) of this chapter.

(2) Synthetic organic substances. A synthetic organic substance is eligible for addition to the list of taxable substances through the process described in paragraph (b)(1) of this section unless such substance is a textile fiber (other than a polymer in extruded fiber form), yarn, or staple, or a fabricated product that is molded, formed, woven, or otherwise finished into an end-use product. However, such substance may be added to the list of taxable substances only if it meets the weight or value test.

(3) Inorganic substances. An inorganic substance is eligible for addition to the list of taxable substances through the process described in paragraph (b)(1) of this section unless it is a fabricated product that is molded, formed, or otherwise finished into an end-use product. However, such substance may be added to the list of taxable substances only if it meets the weight or value test.

(c) Applicability date. This section applies to calendar quarters beginning on or after [date of publication of final regulations in the Federal Register].

Douglas W. O’Donnell,

Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register March 27, 2023, 11:15a.m., and published in the issue of the Federal Register for March 29, 2023, 88 FR 18446)

Section 30D(a) of the Internal Revenue Code (Code) provides a credit (section 30D credit) against the tax imposed by chapter 1 of the Code (chapter 1) with respect to each new clean vehicle that a taxpayer purchases and places in service. The credit is determined and allowable with respect to the taxable year in which the taxpayer places the new clean vehicle in service. This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 30D of the Code (proposed regulations). To date, no regulations have been proposed pursuant to section 30D.

Section 30D was originally enacted by section 205(a) of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343, 122 Stat. 3765, 3835 (October 3, 2008), to provide a credit for the purchase and placing in service of new qualified plug-in electric drive motor vehicles. Section 30D has been amended several times since its enactment, most recently by section 13401 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA).

The amount of the section 30D credit is treated as a personal credit or a general business credit depending on the character of the vehicle. In general, the section 30D credit is treated as a personal credit allowable under subpart A of the Code. Section 30D(c)(2). However, the amount of the section 30D credit that is attributable to property that is of a character subject to an allowance for depreciation is treated as a current year business credit under section 38(b) instead of being allowed under section 30D(a). Section 30D(c)(1). Section 38(b)(30) lists as a current year business credit the portion of the section 30D credit to which section 30D(c)(1) applies. The IRA did not amend section 30D(c)(1) or (2).

The IRA made a number of amendments to section 30D. In general, the purpose of these amendments is to promote the purchase and use of new clean vehicles by lower and middle-income Americans, to promote resilient supply chains and domestic manufacturing, to strengthen supply chains with trusted trading partners, to protect against improper credit claims, and to achieve significant carbon emissions reductions. These amendments are specifically described in the following subsections.

A. Credit amount and critical mineral and battery component requirements

The IRA amends the rules for determining the amount of the section 30D credit. Prior to the amendments to section 30D made by section 13401(a) and (e) of the IRA becoming applicable, the amount of the section 30D credit is calculated based on the vehicle’s battery capacity. The base amount is $2,500, plus $417 for a battery with a capacity of at least 5 kilowatt hours, and an additional $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours, up to a maximum credit of $7,500 per vehicle. Section 13401(a) of the IRA amends section 30D(b) of the Code to provide a maximum credit of $7,500 per vehicle, consisting of $3,750 in the case of a vehicle that meets certain requirements relating to critical minerals and $3,750 in the case of a vehicle that meets certain requirements relating to battery components. The amendments made by section 13401(a) of the IRA apply to vehicles placed in service after the date on which the Secretary of the Treasury or her delegate (Secretary) issues proposed guidance described in new section 30D(e)(3)(B) of the Code relating to the new critical minerals requirements described in new section 30D(e)(1)(A) (Critical Minerals Requirement) and the new battery components requirements described in new section 30D(e)(2)(A) (Battery Components Requirement). See section 13401(k)(3) of the IRA.

New section 30D(e)(1)(A) provides that the Critical Minerals Requirement with respect to the battery from which the electric motor of a vehicle draws electricity is satisfied if the percentage of the value of the applicable critical minerals (as defined in section 45X(c)(6)) contained in such battery that were (i) extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or (ii) recycled in North America, is equal to or greater than the applicable percentage (as certified by the qualified manufacturer, in such form or manner as prescribed by the Secretary). The applicable percentage for the Critical Minerals Requirement is set forth in section 30D(e)(1)(B)(i) through (v) of the Code and varies based on when the vehicle is placed in service. In the case of a vehicle placed in service after the date of issuance of the proposed guidance described in new section 30D(e)(3)(B) of the Code and before January 1, 2024, the applicable percentage is 40 percent. In the case of a vehicle placed in service during calendar year 2024, 2025, and 2026, the applicable percentage is 50 percent, 60 percent, and 70 percent, respectively. In the case of a vehicle placed in service after December 31, 2026, the applicable percentage is 80 percent.

New section 30D(e)(2)(A) provides that the Battery Components Requirement with respect to the battery from which the electric motor of a vehicle draws electricity is satisfied if the percentage of the value of the components contained in such battery that were manufactured or assembled in North America is equal to or greater than the applicable percentage (as certified by the qualified manufacturer, in such form or manner as prescribed by the Secretary). The applicable percentage for the Battery Components Requirement is set forth in section 30D(e)(2)(B)(i) through (vi) of the Code and varies based on when the vehicle is placed in service. In the case of a vehicle placed in service after the date of issuance of the proposed guidance described in new section 30D(e)(3)(B) of the Code and before January 1, 2024, the applicable percentage is 50 percent. In the case of a vehicle placed in service during calendar year 2024 or 2025, the applicable percentage is 60 percent. In the case of a vehicle placed in service during calendar year 2026, 2027, and 2028, the applicable percentage is 70 percent, 80 percent, and 90 percent, respectively. In the case of a vehicle placed in service after December 31, 2028, the applicable percentage is 100 percent.

B. New clean vehicle definition

The IRA amends the definition of the vehicles that may qualify for the section 30D credit. Section 13401(c) of the IRA amends section 30D(d) of the Code by making the credit applicable to “new clean vehicles,” instead of “new qualified plug-in electric drive motor vehicles,” applicable to vehicles placed in service after December 31, 2022. As amended by section 13401(c) and (g)(2) of the IRA, section 30D(d)(1) of the Code defines a “new clean vehicle” as a motor vehicle that satisfies the eight requirements set forth in section 30D(d)(1)(A) through (H) of the Code: the original use of the motor vehicle must commence with the taxpayer; the motor vehicle must be acquired for use or lease by the taxpayer and not for resale; the motor vehicle must be made by a qualified manufacturer; the motor vehicle must be treated as a motor vehicle for purposes of title II of the Clean Air Act; the motor vehicle must have a gross vehicle weight rating of less than 14,000 pounds; the motor vehicle must be propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 7 kilowatt hours, and is capable of being recharged from an external source of electricity; the final assembly of the motor vehicle must occur within North America; and the person who sells any vehicle to the taxpayer must furnish a report to the taxpayer and to the Secretary, at such time and in such manner as the Secretary provides, containing specifically enumerated items.

With respect to the requirement that the motor vehicle must be made by a qualified manufacturer, the IRA creates new requirements for manufacturers of vehicles eligible for the section 30D credit applicable to vehicles placed in service after December 31, 2022. As amended by section 13401(c) the IRA, section 30D(d)(3) of the Code defines a “qualified manufacturer” as any manufacturer (within the meaning of the regulations prescribed by the Administrator of the Environmental Protection Agency for purposes of the administration of title II of the Clean Air Act (42 U.S.C. 7521 et seq.)) that enters into a written agreement with the Secretary under which such manufacturer agrees to make periodic written reports to the Secretary (at such times and in such manner as the Secretary may provide) providing vehicle identification numbers and such other information related to each vehicle manufactured by such manufacturer as the Secretary may require.

The IRA provides that certain fuel cell vehicles may qualify for the section 30D credit. Section 13401(c) of the IRA adds new section 30D(d)(6) to the Code, which includes in the definition of the term “new clean vehicle” applicable to vehicles placed in service after December 31, 2022, any “new qualified fuel cell motor vehicle” (as defined in section 30B(b)(3)) that meets the requirements under section 30D(d)(1)(G) and (H) (North American final assembly and seller reporting requirements).

The IRA disqualifies certain vehicles from the section 30D credit if the battery of the vehicle contains critical minerals or battery components from a foreign entity of concern. As amended by section 13401(e) of the IRA, section 30D(d)(7) of the Code excludes, after certain specified dates, vehicles placed in service with batteries containing certain critical minerals or battery components from a foreign entity of concern from the definition of the term “new clean vehicle.” In particular, amended section 30D(d)(7) provides that the term “new clean vehicle” does not include (A) any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle (as described in section 30D(e)(1)(A)) were extracted, processed, or recycled by a foreign entity of concern (as defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5))), or (B) any vehicle placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle (as described in section 30D(e)(2)(A)) were manufactured or assembled by a foreign entity of concern (as so defined). These rules will be addressed in future guidance.

C. Final assembly requirement

As described in section II.B of the Background section of this preamble, the IRA requires new clean vehicles to undergo final assembly in North America to be eligible for the section 30D credit. This requirement is applicable to vehicles sold after August 16, 2022. See section 13401(k)(2) of the IRA. New section 30D(d)(5) defines “final assembly” as the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.

D. Elimination of phaseout

The IRA eliminates the phaseout of the section 30D credit for vehicles made by manufacturers that have sold at least 200,000 vehicles eligible for the credit for use in the United States after December 31, 2009. Pursuant to section 13401(d) of the IRA this limitation does not apply to vehicles sold after December 31, 2022. See section 13401(k)(5) of the IRA.

E. Special rules

The IRA adds four new special rules under section 30D(f) applicable to vehicles placed in service after December 31, 2022. First, section 30D(f)(8) permits only one section 30D credit to be claimed for each vehicle identification number (VIN). Second, section 30D(f)(9) requires taxpayers to include on the taxpayer’s return for the taxable year the VIN of the vehicle for which the section 30D credit is claimed. Third, section 30D(f)(10) denies the section 30D credit to certain high-income taxpayers. More specifically, section 30D(f)(10)(A) provides that no credit is allowed for any taxable year if (i) the lesser of (I) the modified adjusted gross income of the taxpayer for such taxable year, or (II) the modified adjusted gross income of the taxpayer for the preceding taxable year, exceeds (ii) the threshold amount (Modified AGI Limitation). New section 30D(f)(10)(B) provides that the threshold amount is (i) in the case of a joint return or a surviving spouse (as defined in section 2(a) of the Code), $300,000, (ii) in the case of a head of household (as defined in section 2(b) of the Code), $225,000, and (iii) in the case of any other taxpayer, $150,000. New section 30D(f)(10)(C) defines “modified adjusted gross income” as adjusted gross income (AGI) increased by any amount excluded from gross income under sections 911, 931, or 933.

Fourth, section 30D(f)(11) excludes from the section 30D credit vehicles that exceed certain manufacturer’s suggested retail price thresholds. New section 30D(f)(11)(A) provides that no credit is allowed for a vehicle with a manufacturer’s suggested retail price in excess of the applicable limitation. New section 30D(f)(11)(B) provides that the applicable limitation for each vehicle classification is as follows: in the case of a van, $80,000; in the case of a sport utility vehicle, $80,000; in the case of a pickup truck, $80,000; and in the case of any other vehicle, $55,000. New section 30D(f)(11)(C) authorizes the Secretary to prescribe such regulations or other guidance as the Secretary determines necessary to determine vehicle classifications using criteria similar to that employed by the Environmental Protection Agency and the Department of the Energy to determine size and class of vehicles.

Section 13401(i)(4) of the IRA amended section 6213(g)(2) to provide the IRS with math error authority for the omission of a correct VIN included on the return as required under section 30D(f)(9).

Amended section 30D(g) provides rules for transfer of the credit from the taxpayer to certain registered dealers applicable to vehicles placed in service after December 31, 2023. Those rules will be addressed in future guidance.

Amended section 30D(h) provides that no credit is allowed with respect to any vehicle placed in service after December 31, 2032.

F. IRA applicability dates

Section 13401(k) of the IRA specifies various applicability dates for its amendments to section 30D. As noted previously, except as provided in section 13401(k)(2) through (5) of the IRA, the amendments made by section 13401 of the IRA apply to vehicles placed in service after December 31, 2022. Section 13401(k)(2) of the IRA provides that the amendments made by section 13401(b) of the IRA relating to final assembly apply to vehicles sold after the date of enactment of the IRA (August 16, 2022). Section 13401(k)(3) of the IRA provides that the amendments made by section 13401(a) and (e) of the IRA relating to the per vehicle credit amount dollar limitation and Critical Minerals and Battery Components Requirements apply to vehicles placed in service after the date on which the proposed guidance described in new section 30D(e)(3)(B) is issued by the Secretary. Section 13401(k)(4) of the IRA provides that the amendments made by section 13401(g) of the IRA relating to transfers of the section 30D credit apply to vehicles placed in service after December 31, 2023. Section 13401(k)(5) of the IRA provides that the amendment made by section 13401(d) of the IRA eliminating the manufacturer limitation applies to vehicles sold after December 31, 2022.

Section 13401(l) of the IRA provides a transition rule for a taxpayer who purchased or entered into a written binding contract to purchase a new qualified plug-in electric drive motor vehicle (as defined in section 30D(d)(1) of the Code, as in effect on the day before the date of enactment of the IRA (August 15, 2022)) after December 31, 2021, and before the date of enactment of the IRA (August 16, 2022), and placed such vehicle in service on or after the date of enactment of the IRA. The transition rule provides that such a taxpayer may elect (at such time, and in such form and manner as the Secretary may prescribe) to treat such vehicle as having been placed in service on the day before the date of enactment of the IRA.

A. Notice 2022-46

On October 5, 2022, the Treasury Department and the IRS published Notice 2022-46, 2022-43 I.R.B. 302. The notice requested general comments on issues arising under section 30D, as well as specific comments concerning: (1) definitions; (2) critical minerals; (3) battery components; (4) applicable values; (5) foreign entities of concern; (6) recordkeeping and reporting; (7) tax-exempt entities; (8) registered dealers and eligible entities; (9) the final assembly requirement; (10) vehicle classifications; (11) elections to transfer and advance payments; and (12) recapture. The Treasury Department and the IRS received 884 comments from industry participants, environmental groups, individual consumers, and other stakeholders. The Treasury Department and the IRS appreciate the commenters’ interest and engagement on these issues. These comments have been carefully considered in the preparation of the proposed regulations.

B. Revenue Procedure 2022-42

On December 12, 2022, the Treasury Department and the IRS published Revenue Procedure 2022-42, 2022-52 I.R.B. 565, providing guidance for qualified manufacturers to enter into written agreements with the IRS, as required in sections 30D, 25E, and 45W of the Code, and to report certain information regarding vehicles produced by such manufacturers that may be eligible for these credits. Information required to be reported includes certifications regarding the Critical Minerals and Battery Components Requirements, as required in sections 30D(e)(1)(A) and (e)(2)(A), once those requirements are applicable. In addition, Revenue Procedure 2022-42 provides the procedures for sellers of new clean vehicles or previously-owned clean vehicles to report certain information to the IRS and the purchasers of such clean vehicles.

C. Notices 2023-1 and 2023-16 and 30D White Paper

On December 29, 2022, the Treasury Department and the IRS published Notice 2023-1, 2023-3 I.R.B. 373, which describes definitions for certain terms in section 30D that the Treasury Department and the IRS intended to include in proposed regulations. The Treasury Department also released a white paper on the anticipated direction, as of December 29, 2022, of the proposed guidance on the Critical Minerals and Battery Components Requirements and the process for determining whether vehicles qualify under these requirements (30D White Paper). See “Anticipated Direction of Forthcoming Proposed Guidance on Critical Mineral and Battery Component Value Calculations for the New Clean Vehicle Credit,” Dec. 29, 2022, https://home.treasury.gov/system/files/136/30DWhite-Paper.pdf (last accessed March 28, 2023).

On February 3, 2023, the Treasury Department and the IRS published Notice 2023-16, 2023-8 I.R.B. 479, which modifies Notice 2023-1 by revising the vehicle classification standard that the Treasury Department and the IRS intend to provide in proposed regulations.

D. Proposed guidance described in section 30D(e)(3)(B)

The publication of these proposed regulations in the Federal Register is the issuance of the proposed guidance described in section 30D(e)(3)(B) (as added by section 13401(e) of the IRA). Pursuant to section 13401(a), (e), and (k)(3) of the IRA, the critical minerals and battery components requirements of section 13401(a) and (e) of the IRA amend section 30D with respect to vehicles placed in service after the date on which these proposed regulations are published in the Federal Register. Accordingly, the Critical Minerals and Battery Components Requirements apply to vehicles placed in service after April 17, 2023, the date of publication in the Federal Register.

Section 30D(a) and proposed §1.30D-1(a) provide that there is allowed as a credit against the tax imposed by chapter 1 for the taxable year an amount equal to the sum of the credit amounts determined under section 30D(b) with respect to each new clean vehicle placed in service by the taxpayer during the taxable year.

Section 30D(c) and proposed §1.30D-1(b) provide that the section 30D credit may be allowed as a general business credit or a personal credit depending on whether the property is of a character subject to an allowance for depreciation (depreciable vehicle).

Section 30D(c)(1) and proposed §1.30D-1(b)(1) provide that so much of the credit that would be allowed to a taxpayer under section 30D(a) for any taxable year with respect to all new clean vehicles placed in service by the taxpayer during the taxable year (determined without regard to section 30D(c) and proposed §1.30D-1(b)(1)) that is attributable to one or more depreciable vehicles will be treated as a current year general business credit under section 38 of the Code that is listed in section 38(b)(30) for such taxable year (and not allowed under section 30D(a)). Depreciable vehicles may also be eligible for the credit for qualified commercial clean vehicles under section 45W. However, under section 45W(d)(3), no credit is allowed under section 45W for a vehicle for which a section 30D credit was allowed to any taxpayer for any taxable year. In addition, proposed §1.30D-1(b)(2) would require the apportionment of any section 30D credit with respect to a depreciable vehicle the business use of which is less than 50 percent of a taxpayer’s total use of the vehicle for the taxable year in which the vehicle is placed in service. The portion of the section 30D credit corresponding to the percentage of the taxpayer’s business use of the depreciable vehicle would be treated as a general business credit under section 30D(c)(1) and proposed §1.30D-1(b)(1), and the portion of the section 30D credit corresponding to the percentage of the taxpayer’s personal use of such vehicle would be treated as a section 30D credit allowed under section 30D(a) pursuant to section 30D(c)(2) and proposed §1.30D-1(b)(3).

Section 30D(c)(2) and proposed §1.30D-1(b)(3) provide that the section 30D credit allowed for any taxable year (determined after application of section 30D(c)(1) and proposed §1.30D-1(b)(1)) is treated as a nonrefundable personal credit allowable under subpart A of part IV of subchapter A of chapter 1 (subpart A) for such taxable year. Section 26 of the Code limits the aggregate amount of credits allowed to a taxpayer by subpart A based on the taxpayer’s tax liability. Under section 26(a), the aggregate amount of credits allowed to a taxpayer by subpart A cannot exceed the sum of (i) the taxpayer’s regular tax liability (as defined in section 26(b)) for the taxable year reduced by the foreign tax credit allowable under section 27 of the Code, and (ii) the alternative minimum tax imposed by section 55(a) for the taxable year.

Proposed §1.30D-2 clarifies the definitions of certain terms related to the statutory requirements of the section 30D credit. The definitions contained in proposed §1.30D-2 were substantially described in Notice 2023-1, as modified by Notice 2023-16.

A. Final assembly

Under section 30D(d)(1)(G) and section 13401(k)(2) of the IRA, any vehicle sold after August 16, 2022, must undergo its final assembly in North America to be eligible for the section 30D credit. Section 30D(d)(5) defines “final assembly” as the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.

Proposed §1.30D-2(b) would provide that, for purposes of section 30D(d)(5) of the Code, “final assembly” means the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle. To establish where final assembly of a new clean vehicle occurred, the taxpayer could rely on the following information: (1) the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) pursuant to 49 CFR 565; or (2) the final assembly point reported on the label affixed to the vehicle as described in 49 CFR 583.5(a)(3).

The vehicle’s plant of manufacture as reported in the VIN means the plant where the manufacturer affixes the VIN. See 49 CFR 565.12. The plant of manufacture is reported in the VIN pursuant to 49 CFR 565.15(d)(2). The Department of Energy, Alternative Fuels Data Center (AFDC), and the Department of Transportation, National Highway Traffic Safety Administration (NHSTA), each provide a VIN decoder to the public, which can be used to identify a vehicle’s plant of manufacture. AFDC, VIN Decoder, https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit (last accessed March 28, 2023); NHTSA, VIN Decoder, https://www.nhtsa.gov/vin-decoder (last accessed March 28, 2023).

Labeling requirements in 49 CFR 583.5 require the final assembly point to be reported on the label affixed to a passenger motor vehicle. Final assembly point means the plant, factory, or other place, which is a building or series of buildings in close proximity, where a new passenger motor vehicle is produced or assembled from passenger motor vehicle equipment and from which such vehicle is delivered to a dealer or importer in such a condition that all component parts necessary to the mechanical operation of such automobile are included with such vehicle whether or not such component parts are permanently installed in or on such vehicle. For multi-stage vehicles, the final assembly point is the location where the first stage vehicle is assembled. 49 CFR 583.4(b)(5).

B. North America

Proposed §1.30D-2(d) would provide that for purposes of section 30D(d)(1)(G), “North America” means the territory of the United States, Canada, and Mexico as defined in 19 CFR part 182, Appendix A, § 1(1). The territory described in 19 CFR part 182, Appendix A, §1(1), which provides rules of origin regulations for the United States-Mexico-Canada Agreement, is defined as (a) for Canada, the following zones or waters as determined by its domestic law and consistent with international law: (i) The land territory, air space, internal waters, and territorial sea of Canada, (ii) the exclusive economic zone of Canada, and (iii) the continental shelf of Canada; (b) for Mexico, (i) the land territory, including the states of the Federation and Mexico City, (ii) the air space, and (iii) the internal waters, territorial sea, and any areas beyond the territorial seas of Mexico within which Mexico may exercise sovereign rights and jurisdiction, as determined by its domestic law, consistent with the United Nations Convention on the Law of the Sea, done at Montego Bay on December 10, 1982; and (c) for the United States, (i) the customs territory of the United States, which includes the 50 states, the District of Columbia, and Puerto Rico, (ii) the foreign trade zones located in the United States and Puerto Rico, and (iii) the territorial sea and air space of the United States and any area beyond the territorial sea within which, in accordance with customary international law as reflected in the United Nations Convention on the Law of the Sea, the United States may exercise sovereign rights or jurisdiction.

C. Manufacturer’s suggested retail price (MSRP)

Section 30D(f)(11)(A) provides that no section 30D credit is allowed for a vehicle with an MSRP in excess of the applicable limitation. Section 30D(f)(11)(B) provides that the “applicable limitation” for each vehicle classification is as follows: in the case of a van, $80,000; in the case of a sport utility vehicle, $80,000; in the case of a pickup truck, $80,000; and in the case of any other vehicle, $55,000.

Proposed §1.30D-2(c) would provide that for purposes of section 30D(f)(11)(A), “manufacturer’s suggested retail price” means the sum of: (A) the retail price of the automobile suggested by the manufacturer as described in 15 U.S.C. 1232(f)(1); and (B) the retail delivered price suggested by the manufacturer for each accessory or item of optional equipment, physically attached to such automobile at the time of its delivery to the dealer, which is not included within the price of such automobile as stated pursuant to 15 U.S.C. 1232(f)(1), as described in 15 U.S.C. 1232(f)(2). This price information is reported on the label that is affixed to the windshield or side window of the vehicle, as described in 15 U.S.C. 1232.

D. Vehicle classifications

For purposes of applying the MSRP limitation under section 30D(f)(11)(A), section 30D(f)(11)(C) authorizes the Secretary to prescribe such regulations or other guidance as the Secretary determines necessary to determine vehicle classifications using criteria similar to that employed by the Environmental Protection Agency (EPA) and the Department of Energy to determine size and class of vehicles.

The Treasury Department and the IRS originally announced an intent to propose use of the vehicle classification standards in 40 CFR 600.002 in Notice 2023-1; however, in Notice 2023-16, the Treasury Department and the IRS modified the expected vehicle classification standard set forth in Notice 2023-1 to instead provide that a vehicle’s vehicle classification is expected to be determined consistent with the fuel economy labeling regime described in 40 CFR 600.315-08. Although the EPA vehicle classification standards in both regimes are similar, the fuel economy labeling regime provides for EPA discretion to assign so-called “crossover” vehicles to a class on a case-by-case basis, taking into account consumer perspective and the marketing segment targeted by the manufacturer. EPA, “Fuel Economy Labeling of Motor Vehicles: Revisions to Improve Calculation of Fuel Economy Estimates,” 71 Fed. Reg. 77872, 77913 (Dec. 27, 2006). In addition, the proposed adoption of the fuel economy labeling regime would align the vehicle classification standards for purposes of the section 30D credit with the classification displayed on the vehicle label and on the consumer-facing website FuelEconomy.gov, making it easier for consumers to know which vehicles qualify under the applicable MSRP limitation.

Proposed §1.30D-2(g) would provide that for purposes of section 30D(f)(11)(B), a vehicle’s vehicle classification is to be determined consistent with the rules and definitions provided in 40 CFR 600.315-08 for vans, sport utility vehicles, pickup trucks, and other vehicles. Specifically, “van” means a vehicle classified as a van or minivan under 40 CFR 600.315-08(a)(2)(iii) and (iv), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a)(3)(ii); “sport utility vehicle” means a vehicle classified as a small sport utility vehicle or standard sport utility vehicle under 40 CFR 600.315-08(a)(2)(v) and (vi), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a)(3)(ii); “pickup truck” means a vehicle classified as a small pickup truck or standard pickup truck under 40 CFR 600.315-08(a)(2)(i) and (ii), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a)(3)(ii); and “other vehicle” means any vehicle classified in one of the classes of passenger automobiles listed in 40 CFR 600.315-08(a)(1), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a)(3)(ii).

E. Placed in service

Proposed §1.30D-2(e) would provide that for purposes of the section 30D credit, a new clean vehicle is considered to be placed in service on the date the taxpayer takes possession of the vehicle. This proposed definition is consistent with the meaning of “placed in service” for purposes of other provisions of the Code under which property is considered to be “placed in service” when the property is “placed in a condition or state of readiness and availability for a specifically assigned function” and as “the date on which the owner of the vehicle took actual possession of the vehicle.” See §§1.46-3(d)(1)(ii) and (4)(i), 1.179-4(e) and 145.4051-1(c)(2); see also §1.1250-4(b)(2); Consumers Power Co. v. Commissioner, 89 T.C. 710 (1987); Noell v. Commissioner, 66 T.C. 718, 728-729 (1976).

Section 30D(e) of the Code provides requirements for critical minerals and battery components with respect to the battery from which the electric motor of a new clean vehicle draws electricity. The Critical Mineral and Battery Component Requirements apply to applicable critical minerals and battery components, respectively, contained in a battery as defined in proposed § 1.30D-3(c)(3).

A. Critical Minerals Requirement

Proposed §1.30D-3(a) would provide the rules for determining compliance with the Critical Minerals Requirement. In general, proposed §1.30D-3(a) is consistent with the framework for the Critical Minerals Requirement that was described in the 30D White Paper. Proposed §1.30D-3(a) would provide a three-step process for determining the percentage of the value of the applicable critical minerals in a battery that contribute toward meeting the Critical Minerals Requirement.

i. Step 1: Determine procurement chains

In the first step for determining compliance with the Critical Minerals Requirement, the manufacturer would need to determine the procurement chain or chains for each applicable critical mineral. Proposed §1.30D-3(c)(14) would define a “procurement chain” as a common sequence of extraction, processing, or recycling activities that occur in a common set of locations, concluding in the production of constituent materials. Proposed §1.30D-3(c)(14) would further clarify that sources of a single applicable critical mineral may have multiple procurement chains if, for example, one source of the applicable critical mineral undergoes the same extraction, processing, or recycling process in different locations. Each applicable critical mineral procurement chain would need to be evaluated separately pursuant to proposed §1.30D-3(a)(3)(ii).

ii. Step 2: Identify qualifying critical minerals

In the second step for determining compliance with the Critical Minerals Requirement, each applicable critical mineral procurement chain in the battery would need to be evaluated to determine whether critical minerals procured from the chain have been (1) extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or (2) recycled in North America. Applicable critical minerals that satisfy this requirement are considered qualifying critical minerals. Proposed §1.30D-3(c)(17) would define “qualifying critical mineral” as an applicable critical mineral that is extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America. Proposed §1.30D-3(c)(17) would use a “50% of value added test” to determine whether this definition is satisfied. Thus, an applicable critical mineral would be treated as extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, if: (1) 50 percent or more of the value added to the applicable critical mineral by extraction is derived from extraction that occurred in the United States or in any country with which the United States has a free trade agreement in effect; or (2) 50 percent or more of the value added to the applicable critical mineral by processing is derived from processing that occurred in the United States or in any country with which the United States has a free trade agreement in effect. An applicable critical mineral would be treated as recycled in North America if 50 percent or more of the value added to the applicable critical mineral by recycling is derived from recycling that occurred in North America.

The 30D White Paper explained the likely need for transition rules that would provide manufacturers time to develop the necessary capability to certify compliance with the Critical Minerals Requirement throughout their supply chains—especially given the complexity of battery supply chains and the detailed tracking that would be required—while moving towards more secure and resilient critical mineral supply chains. The proposed 50% of value added test would serve that purpose for vehicles placed in service in 2023 and 2024. For later years, however, the Treasury Department and the IRS anticipate moving to a more stringent test for determining if an applicable critical mineral was extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect, or whether an applicable critical mineral was recycled in North America. This more stringent test would reflect the potential for more detailed tracking throughout manufacturers’ supply chains, which may be necessary to certify compliance with the foreign entity of concern requirements described in section 30D(d)(7)(A) (applicable for vehicles placed in service after December 31, 2024).

The Treasury Department and the IRS specifically request comment on the 50% of value added test, and the best approach for adopting a more stringent test for vehicles placed in service in 2025 and later years. For example, under one approach, the standard of 50 percent or more of the value added to the applicable critical mineral for extraction, processing, or recycling in the definition of qualifying critical mineral, could increase incrementally over time (similar to the incremental increase in the applicable critical minerals percentages in section 30D(e)(1)(B) and proposed § 1.30D-3(a)(2)).

Notably, the 50% of value added test would need to be applied separately for each procurement chain of an applicable critical mineral pursuant to proposed §1.30D-3(a)(3)(ii). For example, lithium that undergoes initial processing activities in a plant in Country A and then is transferred to a plant in Country B to undergo final processing activities, culminating in the lithium being incorporated into a constituent material, would be analyzed under this step together with other lithium moving through the same procurement chain. However, if some of the lithium in the prior example instead undergoes final processing activities in a plant in Country C instead of Country B, then there would be two procurement chains for lithium: (1) Country A to Country B and (2) Country A to Country C.

Proposed §1.30D-3(c)(8) would define “extraction” as the activities performed to extract or harvest minerals or natural resources from the ground or a body of water, including, but not limited to, by operating equipment to extract minerals or natural resources from mines and wells, or to extract or harvest minerals or natural resources from the waste or residue of prior extraction. Extraction would conclude when activities are performed to convert raw mined or harvested products or raw well effluent to substances that can be readily transported or stored for direct use in applicable critical mineral processing. Extraction would include the beneficiation or other physical processes that allow the extracted materials, including ores, clays, and brines, to become transportable. Extraction would include the physical processes involved in refining. Extraction would not include the chemical and thermal processes involved in refining.

Proposed §1.30D-3(c)(13) would define “processing” as the non-physical processes involved in refining of non-recycled substances or materials, including the treating, baking, and coating processes used to convert such substances and materials into constituent materials. Processing would begin when chemical or thermal processes, or the combination of them, are used on extracted minerals or natural resources or manmade minerals or resources to create a new product that, through subsequent steps in the applicable critical minerals supply chain, will be processed into a final constituent material. Processing would include the chemical or thermal processes involved in refining. Processing would not include the physical processes involved in refining.

Proposed §1.30D-3(c)(6) would define “constituent materials” as materials that contain applicable critical minerals and are employed directly in the manufacturing of battery components. Constituent materials could include, but would not be limited to, powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives, as required for a battery cell. The definition of constituent materials describes the materials that distinguish the steps of extraction, processing, and recycling of critical minerals from the subsequent steps of manufacturing and assembly of battery components. Constituent materials would be the final products relevant for calculating the value of the applicable critical minerals in the battery.

Constituent materials would mark the end of processing as the point at which no further chemical, physical, or thermal processes are needed to create the final product that is then used in battery component manufacturing. Constituent materials would similarly mark the end of recycling as the point at which no further transformations are needed to create the final product that is then used in battery component manufacturing. All constituent materials contain applicable critical minerals. Once the final constituent material is created, it then is used as an input to a battery component. Some battery components could be made entirely of inputs that do not contain constituent materials. Inputs used to manufacture battery components that do not contain any applicable critical minerals (for example, solvents, conductive additives, etc.) would not be considered to be constituent materials.

Proposed §1.30D-3(c)(19) would define “recycling” as the series of activities during which recyclable materials containing applicable critical minerals are transformed into specification-grade commodities and consumed in lieu of virgin materials to create new constituent materials; such activities result in new constituent materials contained in the battery from which the electric motor of a new clean vehicle draws electricity. All physical, chemical, and thermal treatments or modifications that convert recycled feedstocks to specification grade constituent materials would be included in recycling. This definition would align with the current methods of direct, hydrometallurgical, or pyrometallurgical recycling that are utilized commercially for reuse of materials for battery applications.

Proposed §1.30D-3(c)(24) would define “value,” with respect to property, as the arm’s-length price that was paid or would be paid for the property by an unrelated purchaser determined in accordance with the principles of section 482 of the Code and regulations thereunder.

Proposed §1.30D-3(c)(25) would define “value added,” with respect to recycling, extraction, or processing of an applicable critical mineral as the increase in the value of the applicable critical mineral attributable to the relevant activity.

Proposed §1.30D-3(c)(11) would define “North America” as the territory of the United States, Canada, and Mexico as defined in 19 CFR. part 182, Appendix A, § 1(1).

Proposed §1.30D-3(c)(7) would define the term “country with which the United States has a free trade agreement in effect” and list the countries with which the United States has a “free trade agreement in effect.” The term free trade agreement is not defined in the IRA or in the Code. The proposed definition takes into account the term’s meaning, use and context in the statute. The IRA’s amendments to section 30D expand the incentives for taxpayers to purchase new clean vehicles and for vehicle manufacturers to increase their reliance on supply chains in the United States and in countries with which the United States has reliable and trusted economic relationships. The Treasury Department and the IRS recognize that more secure and resilient supply chains are essential for our national security, our economic security, and our technological leadership. The Treasury Department and the IRS propose to identify the countries with which the United States has free trade agreements in effect for purposes of section 30D consistent with the statute’s purposes of promoting reliance on such supply chains and of providing eligible consumers with access to tax credits for the purchase of new clean vehicles.

Based on these considerations, the Treasury Department and the IRS propose criteria the Secretary would consider in identifying these countries. As set forth in proposed §1.30D-3(c)(7)(i), those criteria would include whether an agreement between the United States and another country, as to the critical minerals contained in electric vehicle batteries or more generally, and in the context of the overall commercial and economic relationship between that country and the United States: (A) reduces or eliminates trade barriers on a preferential basis, (B) commits the parties to refrain from imposing new trade barriers, (C) establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or (D) reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions on exports.

Applying those factors, the proposed regulations include countries with which the United States has comprehensive free trade agreements (that is, agreements covering substantially all trade in goods and services between the parties, including trade in critical minerals). These are Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. In addition, the Treasury Department and the IRS also propose to include additional countries that the Secretary identifies after considering the factors listed in proposed §1.30D-3(c)(7)(i). One example of such a country is Japan, with which the United States recently concluded a Critical Minerals Agreement (CMA)¹ containing robust obligations to help ensure free trade in critical minerals, including a commitment to refrain from imposing duties on exports of critical minerals that are currently essential to the electric vehicle battery supply chain, a commitment for the United States and Japan to confer on investments in this sector that may affect national security, and detailed undertakings related to the enforcement of labor and environmental laws related to trade in those critical minerals. The CMA was concluded in the context of an earlier trade agreement the United States concluded with Japan in 2019,² a related 2019 agreement on digital trade,³ and the U.S.-Japan Partnership on Trade announced in November 2021.⁴ The Treasury Department and the IRS have consulted with the U.S. Trade Representative in applying the proposed factors here.

Based on an evaluation of the criteria in proposed §1.30D-3(c)(7)(i), the Treasury Department and the IRS would make any necessary amendments to the list in proposed §1.30D-3(c)(7)(ii), including adding any additional countries as any new qualifying international agreements enter into force and the Secretary determines that the factors have been met. The Treasury Department and the IRS would similarly make any necessary amendments based on the modification, termination, or expiration of any previously identified free trade agreements. Proposed § 1.30D-3(c)(7)(iii) would provide that the list of countries in proposed § 1.30D-3(c)(7)(ii) may be revised and updated through appropriate publication in the Federal Register or in the Internal Revenue Bulletin. The treatment of any given country under this overall approach is independent from the inclusion or exclusion of any other.⁵

The Treasury Department and the IRS seek comment on the proposed criteria for identifying countries with which the United States has free trade agreements in effect, other potential approaches for identifying those countries, and the list of countries set forth in proposed §1.30D-3(c)(7)(ii).

iii. Step 3: Calculate qualifying critical mineral content

The third step for determining compliance with the Critical Minerals Requirement would involve the calculation of the percentage of the value of qualifying critical minerals contained in a battery. The proposed regulations refer to this percentage as the “qualifying critical mineral content” and define that term under proposed §1.30D-3(c)(18) as the percentage of the value of the applicable critical minerals contained in the battery from which the electric motor of a new clean vehicle draws electricity that were extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or were recycled in North America. Under proposed §1.30D-3(a)(3)(i), qualifying critical mineral content would be calculated as the percentage that results from dividing the total value of qualifying critical minerals by the total value of critical minerals. Proposed §1.30D-3(c)(23) would define “total value of qualifying critical minerals” as the sum of the values of all the qualifying critical minerals contained in a battery described in proposed §1.30D-3(a)(1). Proposed §1.30D-3(c)(22) would define “total value of critical minerals” as the sum of the values of all applicable critical minerals contained in a battery described in proposed §1.30D-3(a)(1).

Proposed §1.30D-3(a)(3)(iii) would require qualified manufacturers to select a date for determining the values associated with the total value of qualifying critical minerals (determined separately for each procurement chain) and the total value of critical minerals. Such date would need to be after the final processing or recycling step for the applicable critical minerals relevant to the certification described in section 30D(e)(1)(A) of the Code. This date would need to be uniformly applied for all applicable critical minerals contained in the battery. Proposed §1.30D-3(a)(15) would define a qualified manufacturer as a manufacturer described in section 30D(d)(3) of the Code.

Proposed §1.30D-3(a)(3)(iv) would provide that a qualified manufacturer may determine qualifying critical mineral content based on the value of the applicable critical minerals actually contained in the battery of a specific vehicle. Alternatively, for purposes of calculating the qualifying critical mineral content for batteries in a group of vehicles, a qualified manufacturer could average the qualifying critical mineral content calculation over a limited period of time (for example, a year, quarter, or month) with respect to vehicles from the same model line, plant, class, or some combination of thereof, with final assembly (as defined in section 30D(d)(5) of the Code and proposed §1.30D-2(b)) within North America. The Treasury Department and the IRS seek comment on whether to include any more specific conditions or limitations on this ability to average these calculations

The percentage of qualifying critical minerals content that is calculated in Step 3 would ultimately be compared with the relevant applicable critical minerals percentage provided in proposed §1.30D-3(a)(2) to determine whether a vehicle satisfies the Critical Minerals Requirement described in section 30D(e)(1)(A) of the Code.

B. Battery Components Requirement

Proposed §1.30D-3(b) would provide the rules for determining compliance with the Battery Components Requirement. In general, proposed §1.30D-3(b) is consistent with the framework for the Battery Components Requirement that was described in the 30D White Paper. Proposed §1.30D-3(b) would provide a four-step process for determining the percentage of the value of the battery components in a battery that contribute toward meeting the Battery Components Requirement.

i. Step 1: Identify components that are manufactured or assembled in North America

In the first step for determining compliance with the Battery Components Requirement, qualified manufacturers would need to determine whether each battery component in a battery was manufactured or assembled in North America. Such components are referred to in the proposed regulations as “North American battery components” and are defined in proposed §1.30D-3(c)(12) as a battery component substantially all of the manufacturing or assembly of which occurs in North America, without regard to the location of the manufacturing or assembly activities of the components that make up the particular battery component.

Proposed §1.30D-3(c)(3) would define “battery,” for purposes of a new clean vehicle, as a collection of one or more battery modules, each of which has two or more electrically configured battery cells in series or parallel, to create voltage or current. The term “battery” would not include items such as thermal management systems or other parts of a battery cell or module that do not directly contribute to the electrochemical storage of energy within the battery, such as battery cell cases, cans, or pouches. This definition of battery is consistent with the statute because battery modules and cells are the sources “from which the electric motor of such vehicle draws electricity.” Sections 30D(e)(1)(A) and (2)(A). The battery module is the end point for the purpose of calculating the value of battery components.

Proposed §1.30D-3(c)(4) would define “battery cell” as a combination of battery components (other than battery cells) capable of electrochemically storing energy from which the electric motor of a new clean vehicle draws electricity. This definition of battery cell would encompass the smallest combination of battery components necessary for the function of energy storage.

Proposed §1.30D-3(c)(5) would define “battery component” as a component that forms part of a battery and which is manufactured or assembled from one or more components or constituent materials that are combined through industrial, chemical, and physical assembly steps. Battery components would include, but not be limited to, a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module. Constituent materials would not be considered a type of battery component, although constituent materials could be manufactured or assembled into battery components. Some battery components could be made entirely of inputs that do not contain constituent materials. Battery components would include any piece of the assembled battery cell that contribute to electrochemical energy storage.

Proposed §1.30D-3(c)(10) would define “manufacturing,” with respect to a battery component, as the industrial and chemical steps taken to produce a battery component. Manufacturing would use industrial and chemical steps starting with constituent materials and other battery components that do not contain constituent materials to create a new battery component.

Proposed §1.30D-3(c)(2) would define “assembly,” with respect to battery components, as the process of combining battery components into battery cells and battery modules.

ii. Step 2: Determine the incremental value of each battery component and North American battery components

In the second step for determining compliance with the Battery Components Requirement, qualified manufacturers would need to determine the incremental value for each battery component. The resulting incremental value for a battery component would be attributable to North America if the battery component is a “North American battery component” as defined in proposed §1.30D-3(c)(12).

Proposed §1.30D-3(c)(9) would define “incremental value,” with respect to a battery component, as the value (as defined in proposed §1.30D-3(c)(24)) determined by subtracting from the value of that battery component the value of the manufactured or assembled battery components, if any, that are contained in that battery component.

Proposed §1.30D-3(c)(20) would define “total incremental value of North American battery components” as the sum of the incremental values of each North American battery component contained in a battery described in proposed §1.30D-3(b)(1).

iii. Step 3: Determine the total incremental value of battery components

In the third step for determining compliance with the Battery Components Requirement, qualified manufacturers would need to total the incremental value of battery components. Proposed §1.30D-3(c)(21) would define “total incremental value of battery components” as the sum of the incremental values of each battery component contained in a battery described in proposed §1.30D-3(b)(1). The total incremental value of battery components could also be calculated by totaling the value of each battery module in the battery.

iv. Step 4: Calculate the qualifying battery component content

In the fourth step for determining compliance with the Battery Components Requirement, qualified manufacturers would need to determine the qualifying battery component content. Proposed §1.30D-3(c)(16) would define “qualifying battery component content” as the percentage of the value of the battery components contained in the battery from which the electric motor of a new clean vehicle draws electricity that were manufactured or assembled in North America. Proposed §1.30D-3(b)(3)(i) would provide that the qualifying battery component content is the percentage that results from dividing the total incremental value of North American battery components (determined in step 2) by the total incremental value of battery components (determined in step 3).

Proposed §1.30D-3(b)(3)(ii) would require qualified manufacturers to select a date for determining the values associated with the total incremental value of North American battery components and the total incremental value of battery components. Such date would need to be after the last manufacturing or assembly step for the battery components relevant to the certification described in section 30D(e)(2)(A) of the Code. This date must be uniformly applied for all battery components contained in the battery.

Proposed §1.30D-3(b)(3)(iii) would provide that a qualified manufacturer may determine qualifying battery component content based on the incremental values of the battery components actually contained in the battery of a specific vehicle. Alternatively, for purposes of calculating the qualifying battery component content for batteries in a group of vehicles, a qualified manufacturer could average the qualifying battery component content calculation over a limited period of time (for example, a year, quarter, or month) with respect to vehicles from the same model line, plant, class, or some combination of thereof, with final assembly (as defined in section 30D(d)(5) of the Code and proposed §1.30D-2(a)) within North America. The Treasury Department and the IRS seek comment on whether to include any more specific conditions or limitations on this ability to average these calculations.

The percentage of qualifying battery component content that would be calculated in Step 4 would ultimately be compared with the relevant applicable battery components percentage provided in proposed §1.30D-3(b)(2) to determine whether a vehicle satisfies the Battery Components Requirement described in section 30D(e)(2)(A) of the Code.

The Treasury Department and the IRS request comments on the Critical Mineral and Battery Component Requirements as they would be implemented in proposed §1.30D-3, including the distinction between processing of applicable critical minerals and manufacturing and assembly of battery components, and related definitions.

C. Excluded entities

Section 30D(d)(7) of the Code excludes from the definition of “new clean vehicle” any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle (as described in section 30D(e)(1)(A)) were extracted, processed, or recycled by a foreign entity of concern (as defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5))), or any vehicle placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle (as described in section 30D(e)(2)(A)) were manufactured or assembled by a foreign entity of concern (as so defined). The Treasury Department and the IRS intend to issue guidance with respect to section 30D(d)(7) at a later date.

Proposed §1.30D-4 would provide special rules with respect to the section 30D credit.

A. No Double Benefit

Section 30D(f)(2) and proposed §1.30D-4(a)(1) would provide that the amount of any deduction or other credit allowable under chapter 1 for a vehicle for which a section 30D credit is allowable must be reduced by the amount of the section 30D credit allowed under section 30D(a) for such vehicle determined without regard to section 30D(c), which may treat all or a portion of the aggregate credit allowed under section 30D(a) as a current year general business credit under section 38(b).

Proposed §1.30D-4(a)(2) would provide that a section 30D credit that has been allowed with respect to a vehicle in a taxable year before the taxable year in which a credit under section 25E is allowable for that vehicle does not reduce the amount of the allowable section 25E credit. Accordingly, a taxpayer who otherwise satisfies the requirements of section 25E would be eligible to claim the section 25E credit for a vehicle for which another taxpayer previously claimed the section 30D credit.

Proposed §1.30D-4(a)(3) would provide that no credit is allowed under section 45W with respect to any vehicle for which a credit was allowed under section 30D. This rule, which is based on section 45W(d)(3), precludes both the section 30D credit and the section 45W credit from being allowed for the same vehicle, whether in the same or different taxable years.

B. Limitation based on modified adjusted gross income

Section 30D(f)(10) and proposed §1.30D-4(b) would provide that no section 30D(a) credit is allowed for any taxable year if (i) the lesser of (I) the modified AGI of the taxpayer for such taxable year or (II) the modified AGI of the taxpayer for the preceding taxable year exceeds (ii) the threshold amount (Modified AGI Limitation). The threshold amount is $300,000 in the case of a joint return or a surviving spouse (as defined in section 2(a) of the Code), $225,000 in the case of a head of household (as defined in section 2(b) of the Code), and $150,000 for all other taxpayers. “Modified adjusted gross income” is defined in section 30D(f)(10)(C) as the taxpayer’s AGI increased by any amount excluded from gross income under sections 911, 931, or 933 of the Code. Proposed §1.30D-4(b)(4) provides that if the taxpayer’s filing status changes (for example, from single to head of household) in this two-year period, the taxpayer satisfies the Modified AGI Limitation if the taxpayer’s modified AGI does not exceed the threshold amount in either taxable year based on the applicable filing status for that taxable year.

Proposed §1.30D-4(b)(5)(i) would provide that, except as provided in proposed §1.30D-4(b)(5)(ii), in the case of a new clean vehicle that is placed in service by a corporation or other taxpayer that is not an individual for whom AGI is computed under section 62, the Modified AGI Limitation does not apply. Corporations and such other taxpayers do not have AGI computed under section 62, so the special rule in section 30D(f)(10) establishing a Modified AGI Limitation does not apply to these taxpayers.

Proposed §1.30D-4(b)(5)(ii) would provide that in the event that the new clean vehicle is placed in service by a partnership or an S corporation, and the section 30D credit is claimed by individuals who are direct or indirect partners of that partnership or shareholders of that S corporation, the Modified AGI Limitation will apply to those partners or shareholders. The Treasury Department and the IRS request comments on whether a similar rule should be provided for trusts or other types of entities that place in service a new clean vehicle.

C. Multiple owners and passthrough entity ownership of a single vehicle

In certain instances, multiple taxpayers may purchase, place in service, and be titled as owners of a single vehicle. For example, a married couple that files separate tax returns may jointly purchase and take possession of a new clean vehicle that qualifies for the section 30D credit and both spouses may be titled as owners of the vehicle. However, the structure of section 30D provides for one taxpayer to claim the section 30D credit per vehicle placed in service. See generally section 30D(a), (b), (f)(8), (f)(9) and section 6213(g)(2)(T) of the Code. Section 30D does not contain rules for allocation or proration of the section 30D credit with respect to a single vehicle to multiple taxpayers placing that vehicle in service, and such an allocation or proration would present challenges from a tax administration perspective.

Proposed §1.30D-4(c)(1) would provide that, except as provided in proposed §1.30D-4(c)(2), the amount of the section 30D credit attributable to a new clean vehicle may be claimed on only one tax return. In the event multiple owners place in service a new clean vehicle, no allocation or proration of the credit would be available. Proposed §1.30D-4(c)(3)(i) would provide that the name and taxpayer identification number of the owner claiming the credit under section 30D(a) should be listed on the seller’s report pursuant to section 30D(d)(1)(H). Accordingly, multiple owners of a new clean vehicle would inform the seller which owner will claim the section 30D credit so that the seller can identify that taxpayer on the seller’s report. The credit would be allowed only on the tax return of the owner listed in the seller’s report.

Proposed §1.30D-4(c)(2) would provide that in the case of a new clean vehicle placed in service by a partnership or S corporation, while the partnership or S corporation is the vehicle owner, the section 30D credit is allocated among the partners of the partnership under §1.704-1(b)(4)(ii) or among the shareholders of the S corporation under sections 1366(a) and 1377(a) of the Code and claimed on the tax returns of the partners or shareholder(s). Proposed §1.30D-4(c)(3)(i) would provide that in the case of a new clean vehicle placed in service by a partnership or S corporation, the name and tax identification number of the partnership or S corporation that placed the new clean vehicle in service should be listed on the seller’s report pursuant to section 30D(d)(1)(H).

If any provision in this proposed rulemaking is held to be invalid or unenforceable facially, or as applied to any person or circumstance, it shall be severable from the remainder of this rulemaking, and shall not affect the remainder thereof, or the application of the provision to other persons not similarly situated or to other dissimilar circumstances.

Executive Orders 13563 and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.

These proposed regulations have been designated by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. OIRA has determined that the proposed rulemaking is significant and subject to review under Executive Order 12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by OMB.

Any collection burden associated with rules described in these proposed regulations is previously accounted for in OMB Control Number 1545-2137. These proposed regulations do not alter previously accounted for information collection requirements and do not create new collection requirements. OMB Control Number 1545-2137 covers Form 8936 and Form 8936-A regarding electric vehicle credits, including the new requirement in section 30D(f)(9) to include on the taxpayer’s return for the taxable year the VIN of the vehicle for which the section 30D credit is claimed. Revenue Procedure 2022-42 describes the procedural requirements for qualified manufacturers to make periodic written reports to the Secretary to provide information related to each vehicle manufactured by such manufacturer that is eligible for the section 30D credit as required in section 30D(d)(3), including the critical mineral and battery component certification requirements in sections 30D(e)(1)(A) and (e)(2)(A). In addition, Revenue Procedure 2022-42 also provides the procedures for sellers of new clean vehicles to report information required by section 30D(d)(1)(H) for vehicles to be eligible for the section 30D credit. The collections of information contained in Revenue Procedure 2022-42 are described in that document and were submitted to the Office of Management and Budget in accordance with the Paperwork Reduction Act under control number 1545-2137.

The requirement to determine the final assembly location in proposed §1.30D-2(b) by relying on (1) the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) pursuant to 49 CFR 565 or (2) the final assembly point reported on the label affixed to the vehicle as described in 49 CFR 583.5(a)(3) is accounted for by the Department of Transportation in OMB Control Numbers 2127-0510 and 2127-0573.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary hereby certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act. Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on their impact on small business.

The proposed regulations affect two types of business entities: (1) qualified manufacturers that must trace and report on their critical minerals and battery components in order to certify that their new clean vehicles qualify for the section 30D credit, and (2) businesses that may earn the section 30D credit when purchasing and placing in service a new clean vehicle.

While the tracking and reporting of critical minerals and battery components is likely to involve significant administrative costs, according to public filings, all qualified manufacturers had total revenues above $1B in 2022. There are a total of 21 qualified manufacturers that have indicated that they manufacture vehicles currently eligible for the section 30D credit.⁷ Pursuant to Revenue Procedure 2022-42 and following the publication of these proposed regulations, qualified manufacturers will also have to certify that their vehicles qualify under the Critical Minerals and Battery Components Requirements. The proposed regulations provide definitions and general rules for the section 30D credit, including rules for qualified manufacturers to comply with the Critical Mineral and Battery Component Requirements. Accordingly, the Treasury Department and the IRS intend that the proposed rules provide clarity for qualified manufacturers for consistent application of critical minerals and battery components calculations and for taxpayers purchasing new clean vehicles that qualify for the section 30D credit. The Treasury Department and the IRS have determined that qualified manufacturers do not meet the applicable definition of small entity.

Business purchasers of clean vehicles who take the section 30D credit must satisfy reporting requirements that are largely the same as those faced by individuals accessing the section 30D credit to purchase clean vehicles. Taxpayers will continue to file Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit, to claim the section 30D credit. As was the case for the section 30D credit prior to amendments made by the IRA, taxpayers can rely on qualified manufacturers to determine if the vehicle being purchased qualifies for the section 30D credit and the credit amount. The estimated burden for individual and business taxpayers filing this form is approved under OMB control number 1545-0074 and 1545-0123. To make it easier for a taxpayer to determine the potential section 30D credit available for a specific vehicle, the proposed regulations provide business entities with tools and definitions to ascertain whether any vehicles purchased would be eligible for the credit. The VIN reporting required by section 30D(f)(9) and described in the proposed regulations was included in prior section 30D reporting.

Accordingly, the Secretary certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities. The Treasury Department and the IRS request comments that provide data, other evidence, or models that provide insight on this issue.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2023, that threshold is approximately $198 million. This rule does not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (Federalism) prohibits an agency (to the extent practicable and permitted by law) from promulgating any regulation that has federalism implications, unless the agency meets the consultation and funding requirements of section 6 of the Executive order, if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law. This proposed rule does not have federalism implications and does not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.