One of the most notable trends in philanthropy, according to the 2012 Giving USA Study of charitable giving, is that international giving has steadily grown. From 2009 to 2011, international giving was up 15.2 percent, the largest increase across all of the subsectors the study tracks.
Yet U.S. charities engaged in international philanthropy face a number of challenging tax and legal issues that are less relevant in a purely domestic context. Many arise from the fact that the rules under which donors to charitable organizations may claim tax deductions or other benefits for their contributions are governed almost exclusively by the law of each separate jurisdiction. U.S. donors generally may claim an income tax deduction only for charitable contributions made to organizations formed under U.S. law, or under the laws of a U.S. state, the District of Columbia or a U.S. possession. Few treaties allow U.S. persons to make deductible donations to foreign charities.
U.S. charitable organizations engaging in international philanthropy are also subject to a number of restrictions on making grants to foreign organizations. They are responsible, however, for ensuring that funds granted to foreign persons are used in furtherance of the U.S. charitable organization’s exempt purposes.
U.S. private foundations are subject to additional restrictions in this regard. A U.S. private foundation (as well as its officers and directors) is subject to punitive excise taxes on grants to foreign organizations unless it either (i) obtains an equivalency determination that the recipient is the equivalent of a U.S. charity or (ii) exercises expenditure responsibility with respect to the grant.
Because these requirements apply only to U.S. private foundations, and not to public charities, many U.S. private foundations choose to make grants to intermediaries that qualify as public charities rather than to foreign organizations directly.
There have been recent efforts to make obtaining an equivalency determination less burdensome. Recent proposed regulations would expand the range of professionals that can give equivalency determination opinions. When she was in office, then-Secretary of State Hillary Clinton also proposed other changes that would make it easier for a private foundation to make an equivalency determination.
U.S. charitable organizations also are required to observe U.S. reporting requirements. This includes filing Form TD F 90-22.1 and Form 8938 where required, as well as filing applicable information returns.
Charitable organizations that engage in international philanthropy must also take care to comply with the complex and ever-growing web of U.S. laws. For example:
- U.S. Executive Order 13224 imposes strict criminal liability on any entity conducting transactions with an organization that is listed by the federal government as associated with terrorism.
- The U.S. Patriot Act imposes criminal and civil liability for knowing or intentional support of terrorism.
- The Office of Foreign Asset Control (“OFAC”) maintains a sanctions list of countries and a list of specially designated individuals. Organizations who deal with those countries or individuals may be subject to sanction or may have to obtain an OFAC license to conduct certain activities.
- The Commerce Department Bureau of Industry and Security enforces limitations on exports of certain technologies to foreign countries.
- The Foreign Corrupt Practices Act prohibits bribery of foreign officials. In addition, U.S. charitable organizations may be subject to record-keeping requirements if they own a significant interest in a public corporation.
U.S. charities operating or making grants to individuals or organizations in other countries must also take care to observe the laws of the foreign country. For example, many jurisdictions have strict capital import and export laws or banking regulations that must be observed.
As this discussion demonstrates, international philanthropy can involve a number of legal pitfalls. U.S. charitable organizations that engage in international philanthropy need to be aware of them and have adequate procedures in place to avoid them.
Betsy Brill is president of Strategic Philanthropy, a Chicago-based philanthropic advisory practice.
Michael T. Donovan is a partner at Baker & McKenzie LLP in Chicago and is a member of the firm’s Global Wealth Management Group.