International Tax Considerations for Nonprofits

In the current climate, global expansion is a common route for nonprofit organizations if they wish to continue expanding and achieving their exempt purpose with a broader impact. And while COVID-19 has made this process easier in some respects (more remote technology and online processes), the U.S. tax law that relates to nonprofits with international operations and investments hasn’t changed or evolved during the pandemic.

As such, it’s essential to be aware of the legal matters, reporting requirements, and risks associated with operating internationally. Understanding the U.S. filing obligations associated with international activities is necessary to know because the penalties can be quite large for missed filings. And transparency is important for the public and donors so they can understand the organization’s operations and governance to help mitigate risk for the nonprofit.

The following are some key areas to be aware of if your organization operates internationally.

Reporting Foreign Operations and Bank Accounts

First off, the Form 990 requires disclosures to be made on the annual return filed. We typically begin by looking to Part III of the Form 990 and Part IX-A of the 990-PF for descriptions of international programmatic operations. We’d want to be sure to describe and disclosure those in these areas.

There are also trigger questions on all Series 990 forms (excluding the Form 990-N e-postcard) in relation to foreign bank accounts and whether the organization has signature authority or control over one. The answer here is important, as both the organization and its officers and board members need to be considered since both require separate filings depending on their involvement with the foreign accounts. We often see this question (and subsequent filing) missed when the U.S. nonprofit has a separate controlled nonprofit in another country.

Reporting Foreign Donors

For section 501(c)(3) organizations, any foreign donors also need to be listed on Schedule B, Schedule of Contributors.

Even though for public charities these donors aren’t visible to the public, it’s important to identify them, as the IRS wants to know if any expenses were incurred to receive that funding. This could include grant application time, travel, etc. that relates to receiving the grant, and these costs potentially need to be disclosed on Schedule F, Part I if they meet certain thresholds. The same would go for any foreign service providers listed on Form 990 Part VII, Section B or Form 990-PF, Part VIII, Line 3. These may need further disclosure elsewhere.

Reporting International Fund Use

The major area of disclosure on the Form 990, however, would be Schedule F (all parts as applicable).

A reporting is required of all offices, employees, program activities, fundraising activities, investments, etc. that occur or result in fund use in another country. This would include domestic grants that are earmarked for foreign activities. The Schedule F also asks for more information on grant monitoring for foreign grants and requires organizations to report any international grants over $5,000 each year. Grant detail is looking at region, type of entity or individual, and amount and purpose of grants, so the organization is providing more transparency to the public and possible funders, among others.

Reporting Foreign Transfers, Entities, and Structures

Schedule F, Part IV also has several questions regarding foreign transfers, entities, and structures that can be a bit confusing; however, they are important to understand as it helps assist nonprofits with the foreign filings that may be needed beyond the Form 990.

The instructions for this section are very vague and don’t provide much guidance, so it’s important to understand foreign operations and how they are structured:

• Are they registered at all?
• Is there physical presence?
• If registered, what does the country of operation require or allow in terms of structure?
• Are they considered branches or offices of the main U.S. organization?
• Or are they considered a separate and subsidiary nonprofit or NGO in the country of operation?

The answers to these questions all have tax consequences in one way or another.

Reporting International Related Entities

If the international operations are determined to be separate entities, Form 990, Schedule R also needs to be reviewed if these organizations are considered “related” for purposes of the Form 990.

In most cases, we do see a reportable relationship once we understand the structure and control of the foreign operations. Control in the context of the nonprofit industry can be confusing, so understanding how that’s defined and applied to foreign operations is important to determine what further disclosures and filings might be required.

There are also options for organizations to elect certain treatment of the foreign entity to simplify their annual filings as desired.

Questions?

If you’d like to learn more about this topic and what to do with the answers you’ve gathered from above, please join us for a two hour training diving deep into these topics on March 1^st with CCH, a Wolters Kluwer business. You can register for the class here; for a discount, use “CNUBER” at registration.

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