Equivalency Determination
U.S. foundations employ 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 (ED) is a process by which a U.S. grantmaker evaluates whether a potential 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 grantseeker's operations. It must then make a reasonable determination that the grantseeker is the equivalent of a U.S. public charity. ED requires significant up-front work by the grantseeker, including providing detailed financial records and English versions of governing documents. ED also requires significant work by the grantmaker, which must determine whether the documents submitted meet complex IRS requirements. Fortunately, the IRS does not require a grantmaker to independently verify the grantseeker's submissions. Nor does the IRS require a grantmaker to use internal or external legal counsel in making the evaluation, although the grantmaker may do so. It may also use external professionals qualified in ED.
According to surveys of grantmakers that we haveconducted, the typical fees for an ED made by outside counsel range from US$5,000 to US$10,000.
Because EDs cannot be shared by grantmakers under current law, each grantmaker presently makes its own ED pursuant to standards it has independently established. There are no agreed-upon standards or processes for collecting or evaluating data, and grantmakers often ask the same grantseeker for different information during the ED process. Overall, across the sector, ED is an inefficient, redundant, and costly process for both grantmakers and grantseeking NGOs.
Expenditure Responsibility (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. Without ER, these grants would not be permitted. However, ER requires significant recordkeeping and reporting on the part of the grantee, which can be very time-consuming and may place undesirable limitations on the grantee's activities. Thus, despite the complexities of ED, grantmakers often prefer ED over ER.
For more information about ED and ER, please consult the USIG website at http://www.usig.org/legal/er-ed.asp.
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