• IRS Sets New Standards for International Grantmaking by Charities
• Philanthropy in Latin America: An Untapped Well
• International Philanthropy – Assuring Deductions for Mexican Donors

IRS Sets New Standards for International Grantmaking by Charities
In a January 28, 2005, memorandum released by the chief counsel for the Internal Revenue Service, new standards were released for charities that conduct international grantmaking activities. The standards are similar to the rules governing domestic grantmaking. The new standards came amid concerns that charitable contributions could be helping to fund terrorism abroad.

To view the entire standards, click here

Fortunately, however, there are some important exceptions to the domestic organization requirement. As a result, in some limited instances a US donor’s contributions to a foreign organization may be deductible for US income tax purposes, and there are comparable instances where a Mexican donor’s contributions to a US entity may be deductible for Mexican tax purposes. For our purposes here, the exceptions in question arise under a treaty which, under general legal principles, preempts the tax law of general application.

Qualifying for Treaty Benefits
Under the general income tax treaty between the US and Mexico, a U.S. taxpayer may deduct certain contributions to most Mexican exempt organizations, subject to the usual percentage applications applied to the donor’s income from Mexican sources. This treaty affords the same relief to Mexican taxpayers making contributions to United States charities. [The US-Canada tax treaty contains a comparable provision.] Unfortunately, neither country’s income tax return forms or instructions provide sufficient guidance for a taxpayer seeking to claim a charitable contribution deduction on the basis of this treaty provision. Our principal topic here will be how a US organization may avail itself of this treaty provision on behalf of its Mexican contributors. We recently helped an American school navigate this process in order to assist its Mexican parents and alumni in securing Mexican deductions for their contributions to the US school. This involved a three-step process – establishing the credentials of the school as a qualified US charity for purposes of the treaty, then determining what the Mexican tax authorities require to support the contribution deduction, and finally providing Mexican donors with sufficient information on how they may claim deductions on their Mexican income tax returns for their contributions to the US school.

Step One – Proving US Status
A tax treaty between two nations may grant lower tax rates or other benefits to taxpayers of those nations. Obviously, a person or entity may be denied those benefits unless and until it is established that he, she or it is actually a national of the state in question. In the case of the charitable deduction privileges granted under the US-Mexico treaty, this requires the US donee to obtain IRS certification of its status as a tax-exempt charitable organization under section 501(c)(3) of the Internal Revenue Code.

This requirement is described in IRS Publication 686, Certification for Reduced Tax Rates in Tax Treaty Countries, as follows:

“As proof of residency in the United States and of entitlement to the benefits of the tax treaty, U.S. treaty partner countries require a U.S. Government certification that the applicant is a U.S. citizen, U.S. corporation or partnership, or resident of the United States for purposes of taxation. Most treaty partner countries will accept this certification in the form of a computer‑generated certification letter from the Internal Revenue Service (IRS). This letter is also known as Form 6166. 

“[U]pon receiving a written request from a taxpayer, the IRS provides certification by means of Form 6166, a computer‑generated letter to the applicant. This letter is on stationery bearing the U.S. Treasury Department letterhead, the U.S. Government watermark, and the copied signature of the Director, Philadelphia Service Center (PSC)

“After the applicant receives the Form 6166 from the PSC, the applicant may send it to the foreign country to claim treaty benefits.” 

The letter requesting certification of US tax status may be mailed to the IRS at:

IRS-Philadelphia Service Center
Foreign Certification Request
P.O. Box 16347
Philadelphia, PA 19114-0447 

Alternatively, an applicant may fax the request to the Philadelphia Service Center at (215) 516-1035 or (215) 516-3412.

The certification request must include the organization’s name, employer identification number, tax return form number (e.g., 990), and tax period for which the certification is requested. Copies of the organization’s exemption letter and the page from the current edition of IRS Publication 78, Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986 (Volumes I-III), listing the organization should be included with the request. The latter provides evidence that the organization’s exemption has not been revoked. 

Upon receipt of this information in satisfactory form, the IRS Service Center Director will certify in writing that the organization in question is a U.S. exempt organization and a resident of the United States for purposes of U.S. taxation. This certification is in the form of IRS Form 6166, the computer-generated letter described above.

Step Two – Mexican Requirements
A check with the Mexican tax authorities confirmed that the treaty provision on charitable contributions is not reflected on either the Mexican tax return forms or the general instructions. For this reason, a taxpayer claiming a deduction on this basis must refer specifically to Article 22 of the Mexico-US Tax Treaty of 1992. Also, tax return Forms 28 and 29 must be prepared and filed, indicating that the item is exempt per the U.S.-Mexico Tax Treaty.  The donee should list the name, address, and US Taxpayer Identification Number of the donee organization. The form will call for the date of publication of the donee’s authorization in the Federal Official Gazette of Mexico; at this point, the donor should list February 3, 1994, which is the date of publication of the U.S.-Mexico Tax Treaty in the Federal Official Gazette. In addition, all the usual formalities required for substantiation of a contribution should be followed, and the official IRS certificate of residence for the donee (obtained in Step One above) should be retained with the donor’s tax records.

Step Three – Providing Guidance to the Mexican Donor
Because the foregoing information is not generally available, the US donee organization must provide sufficient information to enable the donor to claim the deduction on his or her Mexican tax return and properly document it there. The following is a sample letter by means of which a US charitable organization may explain this situation to its Mexican donors and thus help them properly claim the deduction:

[Letterhead of US Organization]

Dear Friends,

Many of you have asked about the treatment of contributions to [Name of Organization]. As a result, we are providing this guide to help our friends in Mexico get the optimum tax treatment for their gifts.

Under the Mexico-United States Tax Treaty of 1992, contributions by taxpayers in one country to qualified charitable organizations based in the other country are deductible on the donor’s income tax return in his or her home country. Thus, a Mexican taxpayer who makes a contribution to [Name of Organization] is entitled to a charitable deduction on his or her Mexican income tax return (subject to the limitations of the tax laws of Mexico).

Unfortunately, neither country’s income tax return forms or instructions provide sufficient guidance for a taxpayer who wants to take advantage of this treaty provision to claim a charitable contribution deduction. Accordingly, we have asked the Taxpayer Assistance Administration (“Administración de Asistencia al Contribuyente”) for guidance as to what steps a Mexican donor should take to claim a deduction under these circumstances. We were advised that, until the forms or instructions are modified to provide specific advice, the following measures should be acceptable:

1.On your Mexican income tax return or that of your company’s, make a note on Form 2, 8 or 6, according to your own or your company’s applicable tax filing obligations, specifying that your donation to the [Name of Organization] is made pursuant to Article 22 of the Mexico-US Tax Treaty of 1992. Also, tax return Forms 28 and 29 must be prepared and filed, regardless of the tax filing obligations to which the aforementioned forms refer, indicating that the item is exempt per the U.S.-Mexico Tax Treaty.

2. Identify the recipient of your gift as follows:

A. Recipient of donation: [Name and Address of Organization]

B. US Taxpayer Identification Number: 00-0000000

C. Date of publication of authorization in the Federal Official Gazette: February 3, 1994 (this is the date of publication of the U.S.- Mexico Tax Treaty in the Federal Official Gazette)

3.Enclosed with this letter is an official certificate of residence for [Name of Organization] issued by the U.S. Internal Revenue Service. This was issued pursuant to IRS Publication 686 to certify that contributions to [Name of Organization] are entitled to this treatment under the Mexico-US Tax Treaty. You should keep that certificate, along with this letter and all receipts you receive from the organization acknowledging your contributions, with your tax receipts for the year. In the event the Mexican tax authorities audit your tax return, you may be asked to produce these documents.

We hope this letter is helpful. If you have any questions, you should address them to your tax adviser. If that becomes necessary, we would suggest showing the enclosed certificate and this letter to your adviser.

[End of Letter]

This should be sufficient to provide the Mexican donor with all of the information needed to claim the deduction on his or her Mexican income tax return.

Reprinted with permission from the June 2003 issue of Charitable Gift Planning News. ©JAS Destiny Inc. All rights reserved.