Support for EV battery manufacturing – Update on foregone CIT revenue
In February, Regulations came into force that exempt production subsidies payable to Volkswagen (PowerCo) and Stellantis-LGES (NextStar) from corporate income tax (CIT). This note provides a brief review of the corporate tax treatment of the production subsidies for EV battery manufacturing and compares estimates of foregone federal CIT revenue.
In February, Regulations came into force that exempt production subsidies payable to Volkswagen (PowerCo) and Stellantis-LGES (NextStar) from corporate income tax (CIT). This note provides a brief review of the corporate tax treatment of the production subsidies for EV battery manufacturing and compares estimates of foregone federal CIT revenue.
Over the past year, the governments of Canada, Ontario and Quebec have made several major announcements of financial support for EV battery manufacturing. Based on government estimates, the announced support totals $37.7 billion through 2032-33 for Northvolt, Volkswagen and Stellantis-LGES. This consists of $32.8 billion in production subsidies to match the Advanced Manufacturing Production Credit (AMPC) included in the U.S. Inflation Reduction Act (IRA) and $4.9 billion in construction support.
These announced costs, however, do not consider the corporate tax treatment of the production subsidies. PBO noted in its June 2023 report that, given the subsidies are structured to match the U.S. AMPC, a tax adjustment would need to be provided to ensure after-tax equivalency.
Following the release of PBO’s June 2023 report, the Minister of Finance confirmed that the production subsidies provided to Volkswagen will not be subject to taxation.[^1] To exempt the production subsidies to EV battery manufacturers from taxation at the corporate level, PBO noted that legislative changes will be required. These legislative changes will result in foregoing some CIT revenue.
In its November 2023 report, PBO estimated foregone federal and provincial CIT revenues from the tax adjustment for the production subsidies to be $5.8 billion over 2024-25 to 2032-33 (Table 1).[^2] Including this foregone CIT revenue increased PBO’s estimate of the total cost of government support for EV battery manufacturing to $43.6 billion.
In February, the Government of Canada amended the Income Tax Regulations to exempt the production subsidies that will be provided to Volkswagen and Stellantis-LGES for EV battery manufacturing from federal income tax. In its regulatory analysis, the Government indicated that the “cost of foregone federal tax revenue associated with the regulatory amendment is estimated to be about $2.1 billion over ten years, starting in 2024–2025”.[^3] The Government’s estimate is consistent with the PBO’s estimate of foregone federal CIT revenue for Volkswagen ($1.0 billion) and Stellantis-LGES ($1.1 billion) as shown in Table 1.
The current Regulations do not include the production subsidies that will be provided to Northvolt. Finance Canada has confirmed that a similar amendment to the Income Tax Regulations will be introduced for the Northvolt production subsidies.