Why it Works : What is equivalency determination?

U.S. grantmakers generally use one of two legally permitted methods when making grants to charitable organizations outside of the United States: equivalency determination (ED) and expenditure responsibility (ER).

Equivalency determination

Equivalency determination (ED) is a process by which a U.S. grantmaker evaluates whether an intended foreign grantee is the equivalent of a U.S. public charity. The grantmaker must collect a set of detailed information, outlined in IRS Revenue Procedure 92-94, about the grantee's operations and finances and make a reasonable determination of its equivalency.

What does the current ED process require?

ED requires significant up-front work by the grantee, including providing detailed financial records and English versions of governing documents.

ED also requires significant work by the grantmaker, who must determine whether the documents submitted meet complex legal requirements. The IRS does not require a grantmaker to use legal counsel in making the evaluation, although the grantmaker may do so. According to a survey conducted by NGOsource, the typical fees for an ED made by outside counsel range from US$5,000 to US$10,000.

What are the challenges in the current ED process?

Currently, ED is an inefficient, redundant, and costly process for both grantmakers and the NGOs they are trying to help.

Since the law does not allow grantmakers to share EDs, each grantmaker must make its own ED pursuant to standards it has independently established. Yet, there have been no agreed-upon standards or processes for collecting or evaluating data. At present, the ED process is governed by a ruling known as Revenue Procedure 92-94, issued by the IRS in 1992. While this ruling is quite specific in certain areas, it is ambiguous in others. As a result, grantmakers have varying interpretations of how to comply with the IRS's requirements.

In the absence of standardization, NGOs are often asked to provide significantly different information from one grantmaker's ED process to the next, adding an extra burden. Additionally, language and time zone differences often increase the difficulty of obtaining the information needed to evaluate the NGO.

How will NGOsource improve the ED process?

Through its partners around the world, NGOsource will significantly minimize the language and time zone differences that hamper the ED process.

Further, in order to create NGOsource, TechSoup Global and the Council on Foundations — with the assistance of legal counsel Caplin & Drysdale — have applied to the IRS and the U.S. Department of the Treasury seeking clarification and modification of the rules governing equivalency determination. Specifically, they requested a "Private Letter Ruling" authorizing TechSoup Global to establish and maintain an equivalency determination service such as NGOsource. They also submitted to the Treasury Department the request "Proposed Revisions to Revenue Procedure 92-94."

The proposed new revenue procedure would (1) authorize the creation of equivalency determination information repositories on which third parties can rely, and (2) clarify certain standards to be applied in the equivalency determination context.

Once the revenue procedure is approved, NGOsource will be able to use the information gathered for one ED to process EDs for additional grantmakers. This will  significantly reduce the burden on NGOs and increase the efficiency of the ED process and international grantmaking.

Sign up for our newsletter to receive announcements about the regulatory approval process.

Expenditure responsibility

If an NGO does not qualify under ED, a grantmaker may instead consider making a grant using expenditure responsibility (ER).

ER is a set of grantmaking and monitoring procedures and requirements, designed to ensure that grant funds are used for charitable purposes. These procedures and requirements enable U.S. grantmakers to make grants to foreign organizations that are neither recognized as 501(c)(3) public charities by the IRS nor the equivalents of U.S. public charities.

ER requires significant recordkeeping and reporting on the part of the grantee, which can be time-consuming and places limitations on the grantee's activities. It also places additional administrative burdens upon the grantmaker. For these and other reasons, grantmakers often prefer ED over ER.

"Equivalency or Expenditure Responsibility: A Guide in Plain English" (PDF), by Betsy Buchalter Adler and Stephanie L. Petit, is an excellent resource for grantmakers trying to decide between ED and ER.