The world continues to grow ever smaller as individuals and families travel to, do business in and even relocate to new countries. As this trend continues, the desire to give back across borders increases. Whether in response to humanitarian crises or natural disasters highlighted in the news, a desire to create opportunity for others in the country of one’s birth or a multitude of other motivations, U.S. citizens, residents and charitable organizations (U.S. persons) are increasingly incorporating international giving into their philanthropic efforts.
According to Giving USA Foundation, which tracks the recipients of U.S. charitable dollars, in 2017, 6% of U.S. charitable dollars, or $22.97 billion, were donated to international affairs and organizations. While international giving has become easier and more popular, it is important that U.S. persons consider the logistical, legal and tax regulations associated with that giving in order to ensure that their gifts have the intended impact and are entitled to the same tax benefits as gifts to domestic causes and organizations.
Giving by Individuals
There are relatively few legal restrictions on a U.S. person’s ability to give monetary donations to a foreign organization. However, as a general rule, U.S. taxpayers cannot take a federal income tax deduction for donations made directly to foreign nonprofit organizations unless those organizations are described in Section 509(1), (2) or (3) of the Internal Revenue Code.
As a result, many individuals in the U.S. choose to make charitable donations to U.S.-based charities that engage in activities, or make grants, abroad in furtherance of their charitable mission. By donating to a U.S.-based charity, a donor is able to preserve her ability to take a charitable income tax deduction. In addition, due to the regulations and reporting requirements imposed on U.S. charities operating or making grants abroad (discussed in more detail later in this article), the donor has added assurance that her donation will be spent in furtherance of the organization’s charitable goals and purposes.
An example of this type of organization is the Desai Foundation, which Brown Brothers Harriman profiled in the December 2016 issue of Women & Wealth Magazine. Founded by Samir Desai, a native of Gujarat, India, who moved to the United States decades ago and became a successful entrepreneur, the Desai Foundation is a U.S.-based public charity. Now led by Samir’s daughter, Megha Desai, the mission of the Desai Foundation is to empower women and children through community programming to elevate health, education and livelihood in the U.S. and India.
Because the Desai Foundation is a U.S. public charity, donors may make tax-deductible contributions to the organization. The Desai Foundation is also a registered charitable entity in India and can receive tax-deductible charitable contributions from Indian donors as well. The Desai Foundation then uses funds to support its programmatic activities in India, which include children’s health camps, a sanitary napkin program, a vocational sewing program, hygiene training and science and math secondary schools for girls.
Megha says that United Nations data shows that 90% of the money earned by women in local areas is invested back into their communities, which also multiplies the foundation’s investment. A vocational sewing class funded by the Desai Foundation in India, for example, may cost $1,000 to teach 40 women the skills to win jobs that earn about $45 a month in salaries. Over the course of a year, that results in $16,000 in salaries for the women who take the jobs, of which 90% is reinvested in communities.
In evaluating partners in India for their programmatic activities, the Desai Foundation evaluates whether a partner organization can execute on the program for which the Desai Foundation is providing resources. By leveraging the infrastructure of partner organizations on the ground in India, the Desai Foundation has successfully expanded its philanthropic activities to over 500 villages throughout India.1
Giving by Public Charities
Similar to individuals, U.S. public charities face few regulatory or legal restrictions on their foreign charitable activities and grants to foreign organizations. However, U.S. public charities must ensure that their charitable activities and grantmaking, whether domestic or foreign, are consistent with, and in furtherance of, their tax-exempt purposes. Failure to do so puts a public charity at risk for loss of tax-exempt status.
When public charities make contributions directly to other 501(c)(3) organizations, those contributions are presumed to be consistent with their exempt purposes. The challenge for public charities operating or making grants internationally is verifying that those activities or donations are furthering the charity’s exempt purposes. When making grants to foreign organizations or individuals, a U.S. public charity should retain discretion and control over the use of the funds and must maintain records demonstrating how the funds were spent for the charity’s exempt purposes.
The U.S. Department of the Treasury has issued guidelines and best practices to assist public charities in operating and making grants internationally. These best practices include implementing robust policies and procedures for grantmaking, maintaining complete accounting records of all funds received and disbursed in accordance with generally accepted accounting principles and maintaining complete records of the name of each grantee, the amount disbursed and the date and form of each payment.
Before making a grant or providing resources to a foreign charitable organization or cause, a public charity should determine that the potential grantee has the ability to accomplish the charitable purpose of the grant and protect the resources from diversion to noncharitable purposes or terrorist organizations. Public charities should memorialize the terms of grants in written agreements with grantees. Once a grant has been made or resources have been supplied, the charity should continue to monitor the activities of the grantee for the term of the grant and take swift action to correct any misuse of resources by the grantee.
In addition to following the U.S. Treasury guidelines, many public charities choose to adhere to the strict requirements imposed on private foundations that make grants to foreign organizations. By complying with the private foundation rules, public charities can ensure that they are not jeopardizing their tax-exempt status through their international activities.
Giving by Private Foundations
As opposed to individuals and public charities, private foundations are subject to relatively strict requirements when making grants to foreign organizations or individuals. The Internal Revenue Code imposes an excise tax on a private foundation that makes a “taxable expenditure.” Taxable expenditures include distributions or grants to organizations that are not defined as tax-exempt organizations under Section 509(1), (2) or (3) of the Internal Revenue Code. This would include most foreign charitable organizations. The tax imposed on taxable expenditures by private foundations is equal to 20% of the expenditure and can increase to 100% of the expenditure if the expenditure is not corrected.
In order to avoid having a grant to a foreign organization treated as a taxable expenditure, private foundations must exercise “expenditure responsibility” with respect to any such grants. Expenditure responsibility means that the foundation exerts all reasonable efforts and establishes adequate procedures to ensure that the grant is spent only for the purpose for which it is made, to obtain full and complete reports from the grantee regarding how funds are spent and to make full reports to the Internal Revenue Service (IRS) regarding the expenditures.
Before making a grant, a private foundation should conduct a pre-grant inquiry concerning the potential grantee, which includes a review of the identity, prior history and experience of the grantee organization and its staff and a review of the organization’s past activities. Once a decision to make a grant has been made, a private foundation should obtain a signed written agreement memorializing, among other items, how the funds will be spent and committing to provide the private foundation with complete annual reports regarding the use of funds.
The private foundation must then use the information from grantee organizations to provide the IRS with complete reports including the names of grantees, dates and amounts of grants, purposes of grants, how the funds have been spent to date and whether any diversion of funds has occurred. The private foundation must include this information on its annual 990-PF filing with the IRS.
In addition to the varying levels of restrictions facing individuals, public charities and private foundations when making foreign donations or carrying out philanthropic activities abroad, all U.S. persons should be aware of anti-terrorism regulations promulgated by Congress and the Department of the Treasury following the events of September 11, 2001. While the details of those regulations are beyond the scope of this article, donors should be aware that criminal sanctions may be imposed on U.S. persons who contribute funds to international organizations or individuals who fund or support terrorism. While the risk of an inadvertent violation of anti-terrorism regulations is probably quite low for most donors seeking to provide financial assistance to a foreign charitable organization or cause, it is important to be familiar with the laws and ensure that any recipients are not on the Office of Foreign Assets Control’s Specially Designated Nationals list.
While making charitable contributions abroad often involves more complexity, regulatory compliance and recordkeeping than domestic giving, charitable entities and individual donors should not feel deterred. By working closely with your team of advisors, it is often possible to accomplish your desire to support international philanthropic causes.
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1 For more details on the Desai Foundation, read our December 2016 article, “The Desai Foundation: Empowering Communities to Dream Beyond.”