- What is a direct benefit and why is this required? Isn’t this contrary to charitable activities that are experimental and not, until better substantiated, commercially viable? Might argue market failure as a rationale.
- At the end of the day, is this less about charitability and more about private benefit?
International Transactions: To Withhold or Not to Withhold, That is the Question
Withholding can be a trap for unwary U.S. funders of foreign charitable activities. Even funders who are cognizant of the basic requirements of Section 1441 may struggle to understand when those rules apply to their support of foreign activities, which exceptions may be available in their specific circumstances, and what reporting obligations may attach. This panel will review the current state of federal withholding rules relevant to U.S. philanthropy and explore techniques and common practices that U.S. funders are using to manage these obligations.
- U.S. imposes a flat 30% tax(unless reduced by treaty) on the U.S.-source income of non-U.S. taxpayers (other than income effectively connected to conduct of a U.S. trade or business)
- To facilitate collection of tax on non-U.S. taxpayers, withholding obligation falls on U.S. withholding agent (typically, last U.S. person who last handled the funds)
- Two threshold questions regarding withholding:
- 501(c)(3) grants:
- General rule: Grants sourced based on residence of grantor – IRC §863
- Regulations §1.863-1(d): Targeted grants from c3s grantors to non-U.S. grantees are not U.S.-source if funded activities take place entirely outside U.S.
- Other exemptions from witholding: certain international organizations like the World Bank; non-U.S. organizations that are recognized as exempt under 509(a)(1) by the IRS or has a written legal opinion from U.S. counsel that it is the foreign equivalent of a §501(c) organization; and non-U.S. persons claiming benefits under a U.S. tax treaty
- Not grants: scholarships, fellowship grants, grants, prizes, and awards (default – U.S.-source if made by a U.S. payor, but need to look at exceptions too)
- Documentation: depending on circumstances: Form W-9, W-8ECI, W-8EXP, W-8BEN, W-8BEN-E, 8283 – In general, the W-8 forms remain valid starting on the date the form is signed and ending on the last day of the 3rd succeeding calendar year, unless there is a change in circumstance making the information incorrect (under certain conditions, Forms W-8EXP and W-8BEN-E are not subject to “3-year” time limit)
- Are grants always FDAPI?
- Income that is excluded from gross income (as defined in IRC §61) under a provision of law is not treated as FDAPI – IRC §102 provides gross income does not include the value of property acquired by gift
- Some guidance on grants to individuals being excluded – e.g., Rev. Rul. 99-44, Rev. Rul, 2003-12, Rev. Rul. 2006-27
- PLR 200529004: Grant by private foundation to foreign nonprofit is a gift (non-precedential)
- Some grants are gifts, but in 2008, the IRS issued a no-ruling position on gifts (probably not reasonable to assume all grants are FDAPI)
- A gift is given with a “detached and disinterested generosity” (Duberstein) – practical considerations: this might be expressed contemporaneously in minutes and other internal documents, grant agreement (might bifurcate if part FDAPI and part not-sure)
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