Encourage tax-efficient giving to international charities
Human suffering arouses a fierce desire to help. Whether it’s a regular donor giving from their paycheck or a wealthy individual making a substantial grant, the same human response seems to exist within each of us to help those around the world who are less fortunate. or affected by events. of their control. This has been particularly evident over the past two years, in the global response to Covid-19 and the significant contributions to relief efforts to help those affected by the conflict in Ukraine.
Cross-border donations – the term applied to any donation that qualifies for tax relief in one country and is given directly to a foreign charity – is nothing new. But as more and more natural disasters and crises occur, it has become an increasingly popular way to give, prompting a new set of questions for those of us advising our clients on philanthropy. efficient. We have also seen a growing desire on the part of donors to ensure that charitable funds reach their intended recipients “on the ground”. In the last financial year, Charities Aid Foundation (CAF) helped provide almost £1 billion to over 100,000 charities in 110 countries. About a fifth of these donations crossed borders, coming from our offices in the UK, US and Canada.
Cross-border philanthropy has enormous potential, especially to mitigate the effects of a humanitarian crisis. But this means of giving is often constrained by restrictive global frameworks, with a complex web of tax systems and national policy decisions varying from country to country.
In addition, we have recently seen new obstacles. In India, the government introduced new restrictions under the Foreign Contribution Regulation Act (FCRA) in 2020, which prohibited the further awarding of funds between FCRA-compliant organizations. In the UK, we need more information on how Brexit could impact the ability of donors to make tax-advantaged donations from EU member states to the UK. Some practical solutions are already in place; CAF is a proud partner and founding member of the Transnational Giving Europe network, which enables donors to give to good causes across Europe.
With geopolitical risks, sanctions regimes and sometimes hostile attitudes towards philanthropy, how can clients be sure that their donations reach their recipients?
Even though the UK has a relatively liberal system, there are still considerable administrative burdens, and the complex rules can make donations difficult for individual donors. Organizations such as CAF must collect information to ensure that recipients of funds meet national definitions of charitable causes while fulfilling our obligations to minimize the risk of contravening anti-money laundering and anti-corruption regulations. financing of terrorism. When sending charitable funds across multiple jurisdictions and in different languages, the costs of meeting these requirements add up and, in some cases, can be a barrier to operating in certain geographies.
Due in part to the administrative burden, donor-advised funds (DAFs) have rapidly grown in popularity in recent years as donors have become increasingly proactive in their donations. DAFs are flexible, economical and easy to configure. Donations can also remain anonymous and they are tax efficient as customers can donate cash, stocks, property, artwork and antiques.
For example, in the UK, when giving HM Revenue and Customs (HMRC) eligible investments to charity, including shares, a client receives relief from income tax on the value , as well as an exemption from capital gains tax. Shares can be sold for less than their value and then the gain generated will be available for donation. This means customers can reduce their taxable income by the amount of the donation, such as the market value of the shares, plus the transfer fee, minus the selling price paid by the charity, reducing the overall tax payable. .
One of the main advantages of managing donations through a DAF is that fund administrators are responsible for compliance with charitable law and regulatory requirements. Many CFOs employ specialist teams to carry out this task. Within a trust, charitable funds can also grow, which in turn increases the amount available to give to charity.
For the growing number of clients who are both US and UK taxpayers, little is known that they can take advantage of tax breaks in both jurisdictions to maximize their charitable giving. The CAF American Donor Fund has offered this service to clients since 2000, recently exceeding £1 billion in donations to global charitable causes, including recent grants to support humanitarian efforts in Ukraine, Afghanistan and Yemen.
The US market is particularly favorable to philanthropic donations to foreign charities, as the US regulatory model facilitates international grants. US tax authorities approve cross-border donations through two different schemes. Accountability for expenditures requires the review and funding of a specific charitable project and requires at least annual reporting on the expenditure of granted funds. Through equivalency determination, a US foundation determines in good faith that a non-US recipient would meet the requirements of a US public charity. It is a review of the organization itself rather than a specific project and allows for unrestricted grants without the legal requirement to collect grant reports.
Although the UK has a tax system that encourages charitable giving, through gift aid and tax breaks, the regulatory system could learn from the US model to help provide a more efficient method. for UK Philanthropy to fund charities overseas. To enable more efficient and faster cross-border donations from the UK, an adapted version of the determination of equivalence could be introduced. The UK already has the underlying principles required, but a technical improvement to the current approach could speed up cross-border donations.
With an increasingly unstable geopolitical environment and the impact of climate change affecting the food supply and increasing the likelihood of natural disasters, more and more customers will want to give tax-efficiently around the world. To do this, practical changes to the UK tax system could encourage more cross-border giving so aid can get to where it’s most needed quickly.
By refining national and international policies, we can help customers give anywhere safely and fully harness the human response to help those around the world.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Neil Heslop is the Managing Director of the Charities Aid Foundation and has held numerous leadership positions in the telecommunications industry in North America and Europe. He lost his sight at 21 and has since advocated for inclusivity and new technologies in the workplace, co-founding the charity Blind In Business. Heslop advised the UK government on the introduction of the Disability Discrimination Act.
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