By Ismail Shakil

OTTAWA (Reuters) -Canada’s budgetary watchdog estimated on Wednesday that a deal offering Volkswagen production tax credits to build a battery gigafactory in the country will cost taxpayers about C$2.4 billion ($1.8 billion) more than announced.

The forecast comes as the government tries to sweeten a subsidy deal for Jeep maker Stellantis, which stopped construction at a more-than C$5 billion electric vehicle (EV) battery plant in Ontario, saying Ottawa had reneged on promises.

Canada and German carmaker Volkswagen in April together committed more than C$20 billion for the planned Ontario plant, the biggest single investment in the country’s EV supply chain.

This included up to C$13.2 billion in manufacturing tax credits through 2032 and a C$700 million federal grant.

In a review of the deal, Parliamentary Budget Officer (PBO) Yves Giroux said the tax credits would end up costing a bit less than estimated, but Ottawa would need to make about C$2.8 billion in tax adjustments to ensure Volkswagen gets the support it was promised.

Commenting on the report, Finance Minister Chrystia Freeland said that the Volkswagen investment was “fully accounted for” in her budget.

The point of difference stems from the investment’s tax treatment, which Freeland said was because Canada was trying to compete with the U.S. Inflation Reduction Act’s (IRA) non-taxable incentives for clean-tech incentives.

“When the IRA came into force … the U.S. frankly had just changed the game and we knew that Canada had to be at the table,” she told reporters in Ottawa.

Under Canadian law, any monetary support a business receives from the government is considered income, and is therefore taxable. To make the deal match IRA subsidies, the federal government would have to forgive the taxes levied, the PBO said.

Canada, home to a large mining sector for minerals including lithium, nickel and cobalt, is trying to woo companies involved in all levels of the EV supply chain as the world seeks to cut carbon emissions.

Giroux said the economic benefits of the construction of the Volkswagen facility “are marginal”, but the PBO did not estimate the benefits of the factory when it is fully operational.

“We are very confident in the value of the VW investment… we are really confident in the value of our green industrial policy,” Freeland said.

($1 = 1.3283 Canadian dollars)

(Reporting by Ismail Shakil in Ottawa; Editing by Alexander Smith and Angus MacSwan)

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