For Anonymous Donors, Offshore Philanthropy Can Be Appealing

Charles F. Feeney’s decision more than a decade ago to set up his

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2/06/97: A Donor’s Obsession With Secrecy

9/20/99: Making Her Point in Public

major philanthropies in Bermuda rather than his native United States is by no means unique.

Hundreds of foundations have been created outside the United States and major European countries by donors seeking special advantages for their funds, say experts in the field.

Because the phenomenon is still relatively new, few countries have taken steps to regulate such offshore philanthropy. But at a time when the U.S. Congress is examining the propriety of foreign political campaign contributions, the changing patterns of philanthropy seem likely to focus attention on the issue of foreign charitable gifts.

“Our laws in the U.S. are not designed to deal with that issue,” notes Thomas Silk, a San Francisco lawyer who deals with many cases involving international philanthropy. But as giving expands in many parts of the world, he says, more American charities are likely to receive gifts from abroad. “If that is the likely scenario, perhaps it would be wise to begin thinking now of the implications of that change in charitable funding,” he says. “Should U.S. charitable recipients be obligated to report fully on funds received from offshore?”

Popular out-of-the-way places to establish foundations include Bermuda and Barbados, islands favored by North American donors, as well as Malta, Gibraltar, and the Channel Islands, which are favored by Europeans.

“Europeans are now using this more and more,” says Carole S. George, a Washington lawyer with an international practice. “Nationality is becoming obsolete in this realm because financial assets have no borders. I expect to see Barbados and Malta capitalizing on the flow of philanthropic assets around the world.”

Motives for setting up philanthropies outside one’s native country vary, but they often include a desire to avoid what some donors see as oppressive regulations in many countries. In Norway, for example, the government has the right to place a government official on the board of every charity in the country, says Ms. George, whose 1994 book, International Charitable Giving: Laws and Taxation, compares the tax regimes of three dozen countries.

Avoiding taxation can be another factor, since many countries tax the income of corporations and charities alike. Unlike those countries, Bermuda has become a popular haven because it levies no tax on any charity or foundation, says Nicholas P. Johnson, a lawyer in Hamilton, Bermuda.

In addition, privacy can be much easier to preserve. Charities organized as trusts essentially operate privately and need not even register with the Bermudan government, Mr. Johnson says. Those organized as corporations must register but need not disclose any information about their grants or assets.

U.S. private foundations, by contrast, each year must pay an excise tax based on their investment income and must give away at least 5 per cent of their investment assets in grants. They also must file an informational tax return, accessible to the public, that lists their assets, grants, investments, directors, officials’ compensation, and other details. Foundations in Bermuda, Mr. Johnson says, have no such obligations.

The tradeoff required to take advantage of such benefits may be too high for most American donors to pay: forgoing any tax deductions for philanthropic gifts.

Mr. Feeney, who established the Atlantic Foundation and the Atlantic Trust in Bermuda, obtained no U.S. tax deductions when he donated his share of Duty Free Shoppers, the company he helped to found, to his philanthropy, says Harvey P. Dale, the foundation’s president and a professor at the New York University School of Law. As a U.S. citizen, Mr. Feeney must pay tax on his income regardless of where it is earned.

Several factors influenced the decision to set up the foundation in Bermuda. For one thing, Mr. Feeney was then a resident of that island. And, had Mr. Feeney chosen to create his foundation in the United States, he would have been unable to donate to it a share of his business enterprises, since U.S. law bars such concentrations of business assets by foundations. Bermuda, by contrast, does not bar foundations from owning businesses.

What’s more, making foreign grants is easier from Bermuda than from the United States, where the federal government requires that grant makers take certain steps to insure that foreign recipients are conducting charitable activities.

“We believed very strongly that we wanted to do the giving in a low-key — indeed, unusually anonymous — way,” said Mr. Dale. “And that meant that forming in the United States was impossible.”

“You cannot give anonymously in the United States,” confirms Jay Hughes, a New York lawyer with international clients. “You can try to do it, but the I.R.S. knows about it, and if the I.R.S. knows about it, a lot of other people can find out.”

Mr. Hughes adds: “The question for very wealthy people like Mr. Feeney is, Is there any reason why his philanthropic activities should be public in any way?” Since Mr. Feeney chose not to take a U.S. tax deduction for his gift, public money was not involved, Mr. Hughes says. Under those circumstances, he adds, “Isn’t anyone entitled to do what he wants with his money?”

Sheldon S. Cohen, a Washington tax lawyer and former Commissioner of Internal Revenue, agrees. “If a man gives his money and doesn’t take a U.S. deduction,” he says, “why should the United States care?”

For grant makers seeking to maintain their anonymity, privacy is easier to preserve in countries that lack the disclosure laws prevailing in the United States. “The proof of the pudding is that the Atlantic Foundation operated for more than a decade in secrecy,” Mr. Hughes notes. “Had it been in the United States, I don’t think it would have been able to do that.”