IRS Endorses Streamlining of International Grantmaking Procedures

A two-year effort by the to secure guidance that will streamline and encourage international grantmaking has resulted in a general information letter from the Internal Revenue Service affirming that private foundations can use expenditure responsibility procedures for most of their international grants. The letter confirms that foundations need not attempt to determine whether a potential grantee is the equivalent of a U.S. charitable organization before turning to expenditure responsibility.

In 1998, the last year for which data is available, U.S. grantmakers sent $423.5 million in grant dollars, representing 3,944 individual grants, directly overseas. The data is contained in International Grantmaking II, a report from the Foundation Center, published in cooperation with the Council on Foundations.

"We are gratified that the IRS has endorsed this streamlining of international grantmaking procedures," said Dorothy S. Ridings, president and CEO of the Council on Foundations. "This clearly will encourage foundations with international interests to begin or expand their giving abroad."

To ensure that their international grants comply with tax code requirements, private foundations have for many years seen the applicable Treasury regulations as offering two approaches to such grantmaking: equivalency determination and expenditure responsibility. For equivalency determination, foundations must gather information and documents to demonstrate that the potential grantee is the equivalent of a U.S. public charity. This process may involve examining years of financial records, translating organizational documents into English, and reviewing applicable foreign laws. Despite the introduction of a sample equivalency affidavit in 1992, equivalency determination continues to be complex, time-consuming, and costly.

The IRS letter notes that even if one U.S. foundation has chosen to treat a foreign organization as the equivalent of a U.S. public charity, another private foundation may elect to exercise expenditure responsibility in connection with its grant to the same organization. The letter also confirms that, unless the entity has applied for and received an IRS determination letter, the IRS will not treat it as a charitable organization.