NGOsource is a program of TechSoup Global, a 501(c)(3) public charity. Like our members, our primary mission is to serve the global nonprofit sector by reducing duplication and resource waste, while localizing and democratizing international philanthropy.
What is Equivalency Determination?
U.S. grantmakers generally use one of two legally permitted methods when making grants to organizations outside of the United States:
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 about the grantee's operations and finances and make a reasonable determination of its equivalency.
What does the current ED process require?
If done independently by a grantmaker, ED requires significant work by the grantmaker, who must determine whether the documents and information submitted meet complex legal requirements. In September 2015, the IRS issued new regulations describing the kind of advice on which a private foundation or donor-advised fund may rely when making a good-faith determination that its grantees are the equivalent of public charities. The regulations state that such advice (the ED) may be relied upon if provided by a qualified tax practitioner, defined as a U.S. attorney, CPA, or enrolled agent. Notably, while the old regulations permitted foundations to rely on a signed affidavit from their non-U.S. grantees, the new regulations no longer provide a safe harbor for funders whose determinations are based solely on an affidavit of the grantee.
The cost of using outside counsel for a single ED can range from US$5,000 to US$15,000. In contrast, NGOsource’s team of legal experts and our streamlined process enable NGOsource to offer EDs at a significantly lower cost. More importantly, NGOsource prioritizes the experience of the grantee, with an online, multilingual questionnaire, and live, local support through our network of global NGO partners.
What are the challenges in the current ED process?
When conducted by individual grantmakers, ED can be an inefficient, redundant, and costly process for both the grantmaker and the NGO it is trying to help.
Since the law does not allow grantmakers to share EDs or the information used to make the determination with other grantmakers, each grantmaker must make its own ED pursuant to standards it has independently established. Yet, there are no agreed-upon standards or processes for collecting or evaluating data.
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 does NGOsource improve the ED process?
Through its partners around the world, NGOsource significantly minimizes the language and time zone differences that hamper the ED process.
Further, in order to create NGOsource, TechSoup and the Council on Foundations — with the assistance of legal counsel Caplin & Drysdale — applied to the IRS and the U.S. Department of the Treasury seeking clarification and modification of the rules governing equivalency determination. These efforts resulted in guidance that has enabled NGOsource to launch its streamlined ED service.
Now NGOsource’s qualified tax practitioners can use the information gathered for one ED to process EDs for additional grantmakers. This significantly reduces the burden on NGOs and increases the efficiency of the ED process and international grantmaking.
Ready to join? Apply now so you can begin using the service.
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 as 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 puts additional administrative burdens upon the grantmaker. For these and other reasons, grantmakers often prefer ED over ER.
For more information and resources on ER, we recommend you visit our LegalEase blog.