Expenditure responsibility and equivalency determination
How NGOs abroad can meet the requirements of U.S. grantmakers and funders
For NGOs, the world of international grantmaking can feel overwhelming if not intimidating. The level of requirements and amount of paperwork often frustrates good groups from exploring potentially useful international funding sources. A further complication arises when foreign NGOs are asked to demonstrate their eligibility for funding in accordance with the laws and regulations of a grantmaker's country of operations.
This is especially evident for foreign NGOs seeking grants from U.S. based foundations. To do so, foreign NGOs must prove that their legal, tax, and financial status is similar to that of a U.S. public charity. By doing so, they demonstrate their ability to receive philanthropic support from a U.S. foundation.
Organizations meeting the criteria of U.S. Internal Revenue Code section 501(c)(3) are exempt from U.S. federal income tax as charitable entities. Moreover, donations made to these organizations by individuals and corporations are eligible for tax deductions.
In the U.S., the classification of a nonprofit organization as either a public charity or a private foundation impacts the way an organization is perceived as well as the types of funding sources available.
Public charities include entities like schools, hospitals, and universities that receive diverse funding from various sources, including the general public, government, corporations, and other charities.
Private foundations typically rely on a single major funding source, often from one family or corporation. Their primary activity is usually granting funds to other charitable organizations and individuals, rather than directly implementing charitable programs.
Many U.S. grantmakers are private foundations, with an interest in supporting foreign organizations and projects. However, when they do so, they must adhere to IRS regulations to ensure that the funds are used for charitable purposes.
U.S. foundations have two compliance options for international grantmaking: "expenditure responsibility" or "equivalency determination."
Expenditure Responsibility: This involves rigorous oversight by the foundation to ensure proper use of funds by the foreign grantee. It entails detailed reporting and record-keeping by both the foundation and the grantee.
Equivalency Determination: With this method, the foundation evaluates whether the foreign grantee's operations are equivalent to those of a U.S. public charity. This can be a complex process which requires a lot of time and effort from each grantmaker to perform an individual background check and screening on each potential grantee. If not done properly, this can lead to mistakes, redundancy, and significant cost to each grantmaker/funder as well as a significant amount of time from NGOs attempting to determine the proper information to provide.
Recognizing this differentiation is of paramount importance for foreign NGOs. It not only influences their eligibility to receive philanthropic backing but also serves as a compass, directing them towards the right compliance protocols when approaching U.S. private foundations for financial support.
NGOsource, a project of the Council on Foundations and TechSoup, simplifies the process for U.S. grantmakers to assess if NGO grantees match the profile of public charities. Once a foreign NGO has met the equivalency determination, that data is maintained for future consideration by other grantmakers. This reduces the redundancy and burden on NGO grantseekers. NGOsource also provides an online, multilingual questionnaire and local support through its global NGO partner network. This results is a more affordable and cost-effective resource for grantmakers and foundations that also overcomes language and time zone barriers.
As an additional resource for global grantmakers, the Council on Foundations, in partnership with the International Center for Not-for-Profit Law, provides contextual reports on 34 countries to inform funders on the legal frameworks for non-governmental organizations and charities in different countries. These resources serve to empower greater cross-border philanthropy by offering insights into domestic nonprofit laws, regulations, research, and local contacts.
Further Reading Country Notes (COF + ICNL)
Navigating the intricacies of international philanthropy becomes easier when NGOs understand the processes involved with grantmaking, and funders understand the challenges of grantseeking. By collaboratively embracing better online tools and knowledge resources, all parties can further ensure greater accountability, transparency, and effectiveness as support reaches organizations making a difference worldwide.