The growth of international corporate philanthropy continues at a healthy rate. Corporations are taking their existing charitable programmes and implementing them in countries in which they have a business presence and are donating products and inventory to charities abroad. There continues to be great interest among local charities in encouraging charitable contributions by individuals and corporations from outside the charity’s home country. To be successful, these charities are making it as easy for foreign donors to contribute to them as it would be for the same donor to contribute to a local charity.
The situation is different from country to country, but, from a US tax standpoint, a US corporation is only entitled to a charitable contribution deduction if the donation is made to a charity organised in the United States.
To be clear, US tax laws do not restrict the ability of US charities to conduct any or all of their activities overseas. The only meaningful limitation (provided that the US charity is formed as a corporation) is that the contributor must make the initial contribution to a charity organised in the United States. A US corporation’s affiliated private foundation qualifies as such an entity and may be used indirectly by a US corporation to make grants overseas.
Some corporations conduct their charitable activities directly, some form affiliated charitable private foundations and still others utilise a combination of both models. Whichever form giving takes, it must be ideally suited not just to the corporation, but also to the charity and the type of assistance that is needed.
When natural disasters strike, corporate philanthropic response must, primarily, be fast and efficient. Too often, corporations have idealistic goals, but are ill-prepared to respond quickly to catastrophes at the time of crisis. The result is charitable assistance that is often provided too late and almost always inefficiently.
The key to successful disaster response is having policies and procedures in place in advance. The planning and procedures could involve identifying and establishing relationships with existing international charities, preparing the corporation’s own private foundation for foreign charitable assistance, or, in some cases, preparing a foreign branch of the corporation for charitable action. The procedures should address how the corporation’s cash donations will be made, how possible employee contributions to relief efforts will be coordinated, how possible product contributions will be processed, how records will be maintained supporting the contributions made and, where appropriate, how press releases will be prepared to allow the corporation to publicise its efforts.
In addition to pre-planning the method by which assistance will be provided, the corporation should establish operational guidelines with approval authorities so that decision making can be as nimble as possible at the time of crisis. In the United States, all proposed policies and procedures must be reviewed for consistency with the Patriot Act. In all countries, they should be reviewed against charitable contribution laws to ensure legality as well as tax efficiency. While not of paramount importance compared to providing charitable assistance, tax efficiency at least ensures that the maximum benefit is being obtained by the charity and the donor.
US Employee Relief Funds
A significant number of US corporations have established affiliated US charities with the primary purpose of providing emergency financial assistance and disaster relief payments to employees (and often retirees and dependents of employees) in times of need. Properly structured and operated, these programs, often known as “Employee Relief Funds”, are considered charitable activities in the United States. Over the past decade or so, there has been a meaningful increase in the number of Employee Relief Funds expanding the potential recipients of their assistance to include employees of the foreign branch of the US corporation. For any corporations expanding these or similar activities overseas, local laws must be reviewed to determine the most efficient means by which to conduct these types of charitable activities. In the United States, careful policies and procedures must be adopted to ensure that US charitable and private foundation rules are not violated.
Exporting Corporate Philanthropy One method by which a US corporation (or the affiliated foundation of the US corporation) may establish a charitable presence in a particular country is to create an affiliated charity in that country. Unfortunately, the transactional costs associated with this strategy, the limitations imposed on the charity by local law and the likelihood that the foreign entity would be the functional equivalent of a US private foundation for US tax purposes (thereby creating limitations on its ability to receive funds from US foundations), may result in the costs of this strategy far exceeding its utility.
A more prudent option for a US corporation seeking to establish a charitable presence in a foreign country is for the corporation’s affiliated foundation to establish a “branch office”. Structured properly, the branch office would be ignored for US tax purposes and would not have a separate presence in the foreign country that would subject the non-US entity to local taxation.
The branch office could be operated by an employee of the foreign entity owned by the US corporation provided, however, that strict policies and procedures are in place to ensure that charitable funds are being monitored and expended appropriately.
The branch office structure works in many but not all countries, and similar rules would apply to non-US corporations. In times of natural disasters or when emergency financial assistance/disaster relief is needed by foreign employees, the branch office could be the most efficient means by which to provide such assistance. Importing Corporate Philanthropy For non-US charities, the issues are not typically how to get charitable funds into the United States (Hurricanes Katrina and Rita notwithstanding). Instead, the question most frequently asked is how best to gain access to charitable contributions made by US corporations, charities or individuals. Historically, foreign charities were fond of using so-called “friends-of ” organisations to support their cause. A friends-of organisation is simply a charity formed in the United States with the purposes of supporting a charitable organisation in another country. While the adoption of both the Patriot Act and the Pension Protection Act made it more difficult to establish friends-of organisations, it did not eliminate them altogether.
Accordingly, for foreign charities seeking grants from US individuals and corporations, the friends-of organisation remains a viable option. For non-US charities seeking grants from US private foundations, the charity should follow procedures to qualify themselves as the “equivalent” to a US public charity. Once established as an equivalent, the US private foundation may make a grant to the non-US charity without the US foundation being required to exercise expenditure responsibility. This is a somewhat burdensome procedure imposed on US foundations for grants made to non-US charities, so avoiding it can be very welcome.
Establishing “equivalency” is a relatively easy matter that typically involves obtaining an opinion of legal counsel that the non-US charity is the “equivalent” public charity. Once the equivalency letter is obtained, the non-US charity may continue to use the same counsel letter for all requests for funds until such time as the underlying facts and circumstances change.
With so many ways and opportunities for giving, the future looks bright for charities that can attract the attention of a generous corporation.