Ten Questions You Should Ask Before Making a Gift Outside the USA

November 08, 2019
The world in a pair of hands - Ten Questions You Should Ask Before Making a Gift Outside the USA

Originally Published on GrantStation

Fifteen years have passed since the world became virtually borderless. Tools like Skype, Facebook, and Twitter have enabled us to be more connected than ever before. Friends and families can now keep in touch even when oceans apart, news can be shared in real time, and action can be immediate. Yet a growing number of studies are warning us that our seemingly vibrant virtual social networks are a trap leading to acute loneliness. Why are we talking about the possible negative impacts that social media has on our happiness? Well, a recent study proposed a new strategy for tackling the loneliness epidemic: less focus on self.

This is good news. An admittedly optimistic point of view is that we all have the capacity to focus on helping others. The findings of the World Giving Index, a CAF report that explores questions defining charitable behavior across the world, confirm this belief. According to this report, in spite of occasional fluctuations, the world is becoming more charitable; the giving gap between the continents is closing, and more people are volunteering worldwide. Moreover, while the proportion of those donating money has declined in the past two years, according to Giving USA 2018, the amount given to charity by American donors is at record levels. Whether you’re determined to avoid the loneliness epidemic by increasing your focus on helping others, or you’re keen to use the knowledge gained from having the world at your fingertips to make a difference, here’s how you can do it.

The only way U.S. donors can support the causes they most care about worldwide and qualify for a tax-deduction on their charitable donation is to give to a U.S. 501(c)(3) public charity that will either 1) carry out the activity abroad, or 2) serve as an intermediary organization that undertakes the necessary due diligence to make a legal charitable grant to the foreign organization. U.S. taxpayers—whether individuals or corporations—may also choose to give directly to a foreign organization. In fact, technology makes direct giving easier than ever before. However, it is important to note that donors cannot claim a U.S. tax deduction for such direct contributions and they are responsible for compliance with federal regulations applicable to cross-border giving (as described below).

  • Giving to a U.S. 501(c)(3) With International Programs
    Donors committed to expanding their philanthropic giving beyond the borders of the United States will often start by supporting U.S. 501(c)(3) public charities with programs operating abroad. In this scenario, the donor is making a donation to a U.S. public charity and therefore is entitled to a tax deduction on their donation. Giving to a U.S. 501(c)(3) public charity operating abroad may be the preferred option for donors looking to support a well-established organization they are familiar with or one they can easily learn about online.
  • Giving to a U.S. Intermediary Organization
    Individual and corporate donors aiming to support foreign organizations on the ground can do so by making a contribution to a U.S. intermediary grantmaking organization that provides a tax receipt for their donation and then undertakes the necessary steps to make a legal charitable grant to the foreign organization. This tax-effective giving option can be very convenient as it enables donors to focus on their philanthropic vision, while the intermediary organization is responsible for regulatory compliance and grant administration.

Prior to making a grant to a foreign organization, the intermediary organization will have to either establish that the foreign organization is equivalent to a U.S. 501(c)(3) public charity (Equivalency Determination), or it has to confirm that the funding will be used exclusively for charitable purposes (Expenditure Responsibility). Beyond the requirements of Equivalency Determination and Expenditure Responsibility—the two protocols established by the IRS for cross-border giving—the norms applicable to cross-border giving also include federal regulations around anti-money laundering, anti-terrorism, anti-bribery, and government sanctions as established by a) the USA PATRIOT Act, b) Executive Order 13224, c) the Foreign Corrupt Practices Act, and d) the Office of Foreign Assets Control economic and trade sanctions. Compliance with this list of regulations is required irrespective of the giving mechanism used by the U.S. donor. In other words, these requirements are not triggered by U.S. tax-deductibility, and the U.S .donor will be liable for compliance even if they give directly to the foreign organization without a tax benefit.

The giving mechanism that best fits a donor’s needs depends on a multitude of factors; however, those who understand the complexity of cross-border giving often opt to give through an intermediary organization that can ensure regulatory compliance, help them manage risk, and protect their reputation. To achieve this, most donors choose to either support “Friends of” organizations or establish a donor-advised fund at a 501(c)(3) public charity that has a proven track record of cross-border giving.

“Friends of” organizations are established for the purpose of raising funds in the United States that will ultimately benefit a certain foreign charity. It is of utmost importance that “Friends of” organizations maintain control and discretion over the donations they receive so as not to be deemed by the IRS as a mere conduit. As such, “Friends of” organizations should have a board that maintains full discretion and control over the use of the donations, have a majority of board members who are not also board members of the foreign organization, and carry out their own charitable purposes other than simply supporting the foreign organization. Their fundraising materials must inform the U.S. donors that their donations are under the independent control of the U.S. “Friends of” organization. While not an exhaustive list, If the above conditions are met, the IRS is less likely to regard the “Friends of” organization as a pass through and, as a U.S. public charity, the “Friends of” organization is able to provide donors a tax receipt for their charitable contributions.

donor-advised fund (DAF) is a separately identified fund owned and controlled by a sponsoring 501(c)(3) organization. However, in line with the law, the donor or their appointed advisor on the fund can “reasonably expect to have advisory privileges with respect to the distribution or investment of the funds.” In this scenario, the donor makes a contribution to the DAF and immediately receives a tax receipt for their charitable donation. The sponsoring organization will manage the fund (which can be invested) and will make grants from the fund at the recommendation of the donor.

It is important to note that not all DAF sponsoring organizations engage in cross-border giving. However, the ones that provide this option will need to 1) conduct their own extensive due diligence to ensure that the foreign charity recommended by the donor is a U.S. 501(c)(3) public charity equivalent or that the funds will be used for exclusively charitable purposes, (2) impose reporting obligations with respect to grants made to a foreign organization, and (3) comply with strict anti-money laundering and terrorist-financing prohibitions and regulations, as outlined above.

Given the complexity of cross-border giving, our recommendation is to use a trusted intermediary to help achieve your international philanthropic strategy. It takes time to build trust and there is no one-size-fits-all approach that guarantees success. However, to help you start this process, here is a list of key questions you should ask when you’re selecting your intermediary partner:

  1. What are the fees charged for the services you require? Are there additional fees for granting to high-risk areas? What services are included in the quoted fees and what additional fees might be incurred?
  2. In how many countries has the intermediary successfully vetted organizations and made grants? Can you recommend gifts to the organization of your choice, or only to a list of prescribed organizations?
  3. What is the longevity and experience of the intermediary? How many years of successful international grantmaking do they have? What is the intermediary’s reputation internationally and in the places where they support projects?
  4. Does the intermediary vet the organization they grant to or are they relying on the advice of others? If so, whom? And why? What happens if the organization of your choice fails to become approved (vetted) by the intermediary?
  5. What protocol does the intermediary use to vet foreign organizations? Quiz the intermediary on their understanding of U.S. and international regulations. Does the intermediary take full risk and responsibility for the grant being made or do they shift the risk to you?
  6. Is the intermediary fully aware of the laws governing the transfer of your donation into the foreign country?
  7. What controls does the intermediary have in place to ensure that funds are spent effectively?
  8. Does the intermediary have offices and experts around the world who can assist in grantmaking or are they relying only on the Internet or single office staff?
  9. Does the intermediary also support domestic giving? How are grants transmitted to foreign organizations (wire transfer, physical check, etc.)?
  10. Does the intermediary have 501(c)(3) status in the U.S.? If not, are you comfortable with knowing that you won’t receive tax benefits as a result of your donation?

List excerpted from Cross-Border Giving: A Legal and Practical Guide, CharityChannel Press, 2019

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