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Encouraging Tax Effective Donations to International Charities

June 23, 2022, 8:45 AM

Human suffering prompts a fierce desire to help. Whether from a regular donor who gives from their pay or a high-net-worth individual who makes a substantial grant, the same human response seems to exist within all of us to help those around the world who are less fortunate or affected by events out of their control. This has been particularly evident during the last two years, in the global response to Covid-19 and the significant contributions towards relief efforts to help those affected by the conflict in Ukraine.

Cross-border giving—the term applied to any donation that qualifies for tax relief in one country and is given directly to a foreign charity—is not new. But as more natural disasters and crises occur, it has become an increasingly popular way to give, prompting a new line of queries for those of us advising clients on effective philanthropy. We have also seen an increasing desire from donors to ensure charitable funds reach the intended recipients “on the ground.” In the last financial year, Charities Aid Foundation (CAF) helped deliver almost 1 billion pounds to over 100,000 charities in 110 countries. About a fifth of those donations moved across borders, originating from our offices in the UK, the US, and Canada.

Cross-border philanthropy has huge potential, particularly in alleviating the effects of a humanitarian crisis. But this means of giving is often limited by restrictive global frameworks, with a complex web of tax systems and national policy decisions varying from by country.

Additionally, we have in the recent past seen new barriers. In India, the government introduced new restrictions as part of the Foreign Contributions Regulation Act (FCRA) in 2020, which prohibited the onward granting of funds between FCRA compliant organizations. In the UK, we need more information on how Brexit might impact donors’ ability to make tax-effective donations from European Union Member States into the UK. There are some practical solutions already in place; CAF is a proud partner and founding member of the Transnational Giving Europe network, which allows donors to give to good causes across Europe.

With geopolitical risks, sanctions regimes, and sometimes hostile attitudes to philanthropy, how can clients be sure that their donations are reaching their intended recipients?

Growing Popularity

Even though the UK has a relatively liberal system, there are still considerable administrative burdens, and the complex rules can make giving difficult for individual donors. Organizations such as CAF need to collect information to ensure fund recipients fulfill national definitions of charitable causes while also fulfilling our obligations to minimize the risk of contravening anti-Money laundering and counter the financing of terrorism regulations. When sending charitable funds across multiple jurisdictions and in various languages, the costs involved in fulfilling these requirements accumulate and, in some instances, can act as a barrier to operating in certain geographies altogether.

Due in some 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 giving. DAFs are flexible, cost-efficient and easily set up. Donations can also remain anonymous, and they are tax effective because clients can donate cash, stocks, shares, property, art, and antiques.

For instance, in the UK, when giving HM Revenue and Customs (HMRC) qualifying investments to charity, including shares, a client receives income tax relief on the value, as well as exemption from capital gains tax. Shares can be sold for less than their value, and then the gain generated will be available to donate. This means that clients can reduce their taxable income by the donation amount—such as the market value of the shares, plus any costs of the transfer, less the sale price paid by the charity—reducing the overall income tax liability.

One of the key advantages of managing giving through a DAF is that the fund’s trustees are responsible for compliance with charitable law and regulatory requirements. Many DAFs employ specialist teams to carry this out. Within a trust, charitable funds can also grow, which in turn increases the amount available to give to charity.

For the increasing number of clients who are dual US–UK taxpayers, it is little known that they can take advantage of tax relief in both jurisdictions to maximize their charitable donations. The CAF American Donor Fund has offered this service to clients since 2000, recently surpassing 1 billion pounds in donations toward global charitable causes, including recent grants to support humanitarian efforts in Ukraine, Afghanistan, and Yemen.

Favorable Market

The American market is particularly favorable to philanthropic donations to overseas charities because the US regulatory template facilitates granting internationally. The American tax authorities endorse cross-border giving via two different schemes. Expenditure responsibility requires a review and funding of a specific charitable project and calls for at least annual reports on the expenditure of granted funds. Through equivalency determination, a US foundation makes a good-faith determination that a non-US grantee would meet the requirements of a US public charity. This is a review of the organization itself rather than of 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 donations, through gift aid and tax relief, the regulatory system could take inspiration from the US template to help deliver a more efficient method for philanthropy from the UK to fund charities overseas. To enable more effective and expedited cross-border giving from the UK, a tailored version of equivalency determination could be introduced. The UK already has the underlying principles required, but a technical enhancement of the current approach could accelerate cross-border giving.

With an increasingly unstable geopolitical environment, and the impact of climate change affecting food supply and increasing the likelihood of natural disasters, more and more clients will want to give tax-effectively around the world. To enable this, practical changes to the UK tax system could encourage more cross-border giving so aid can be delivered rapidly to where it is needed most.

With refinements to national and international policies, we can help clients to give anywhere safely and fully harness the human response to help those around the world.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Neil Heslop is the chief executive officer of the Charities Aid Foundation and has held numerous senior leadership roles in the telecom industry in North America and Europe. He lost his sight at age 21 and has since advocated for inclusiveness and new technologies in the workplace, co-founding the charity Blind In Business. Heslop has advised the UK government on the introduction of the Disability Discrimination Act.

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