International Grantmaking Issues for Nonprofits

International risks for nonprofits took center stage in recent headlines, and as organizations increasingly expand beyond domestic borders, it’s clear the conduct of foreign employees can have a real impact on an organization’s ability to carry out its mission and maintain its reputation.

Does your organization face international compliance issues? The answer may surprise you, as there are many activities common to the nonprofit sector that are subject to international taxes and regulations – even some that are conducted from within the United States.

Does your organization:
  • Invest abroad by awarding international grants?
  • Employ foreign nationals in their home countries or in the United States?
  • Conduct operations in a foreign country?
If so, it is important to consider a variety of tax issues that may impact your organization’s bottom line. In the first of part of our series on top international tax issues impacting nonprofits, we explore key obstacles associated with international grantmaking.

While organizations of all types face international risk, certain organizational structures may encounter specific sets of challenges:

Private Foundations
Foundations are required to evaluate grant recipients and determine whether they qualify as the equivalent of a U.S. public charity. Equivalency determination is the most common process used to perform this initial due diligence. Revenue Procedure 92-94 outlines the information that foundations must collect about the grantee’s operations and finances. The grantmaker should have a process to collect the information necessary to determine equivalency and can use a qualified tax practitioner to perform the determination.

In some cases, foundations may choose to perform expenditure responsibility instead, which ensures funds are used for charitable purposes regardless of whether the grantee qualifies as a public charity. Although expenditure responsibility may be a cheaper option, it entails more long-term data collection.

As a best practice, foundations should have a checklist of information needed prior to making a payment to a foreign entity and another for post-grant compliance. Private foundations that are deemed noncompliant are subject to an excise tax and could experience negative publicity if funds they send overseas are misused.

Public Charities
While public charities are not subject to the same Treasury regulations on foreign grantmaking, they are wise to follow the same guidelines issued for private foundations. The most pressing concerns for public charities are reputational concerns, which can tarnish their brand or negatively impact donor relations. Performing adequate due diligence on potential grant recipients can help mitigate these risks.

Donor Advised Funds
Under the Pension Protection Act, donor-advised funds (DAFs) are subject to a series of potential restrictions on international activity. In particular, DAFs are prohibited from issuing grants to individuals.  In addition, when making grants to foreign charities, DAFs must take reasonable efforts to ensure that monies are spent for their intended purposes by exercising expenditure responsibility.

Regardless of structure, there are certain international considerations that all nonprofits should remain aware of when operating or funding across borders.

As a result of recent legislation, U.S.-based charities making grants to international organizations are required to comply with various anti-terrorism measures. To ensure they do not issue funds that assist, sponsor or support terrorist activities, organizations are required to check the names of foreign grant recipients against terrorist lists maintained by the U.S. and the United Nations. Additionally, organizations must obtain an agreement that the grant is not U.S. source income and that no withholding will be made. Organizations should implement policies to educate staff and the Board on anti-terrorism programs, and put in place a compliance checklist outlining the necessary steps before issuing payments.

Nonprofits operating abroad are also subject to legislation specific to each foreign nation where they are based. In April, the Chinese government passed a law mandating that all foreign organizations (including NGOs) register with the police and obtain a Chinese sponsor in order to continue their work within China. This is not the first piece of legislation limiting international activity in the nonprofit sector; the Chinese ruling is reminiscent of legislation passed in Russia throughout the past decade that imposed further governmental controls on NGOs operating in Russia.

Whether or not other foreign nations will introduce similar legislation remains to be seen. However, many organizations may consider establishing in-country legal entities as a precautionary measure, in order to efficiently and successfully comply with unexpected legislation changes.
Stay tuned for part two in our international tax series, which will focus on nonprofit employees and specific income tax concerns.