Clive Cutbill examines the impact that an increasingly regulated financial industry is having on international philanthropy – with some surprising findings.
In IFC Review 2009 (at page 27) I wrote an article entitled ‘International Philanthropy: Territoriality, Local Benefit and a Changing World’. That article began with the words: “Even in times of profound global economic difficulties, philanthropy remains important to high net-worth individuals” and went on to explain how the rules of ‘territoriality’ and ‘local benefit’ may affect donors who wish to give tax-effective financial support to charities on a cross-border basis.
Although the jury may still be out as to whether ‘green shoots of recovery’ are now emerging (and if so, whether they will be killed off by a further economic cold snap), it is interesting to consider how philanthropists have reacted to financial conditions over the last twelve months. Before addressing this issue and then turning to reflect on whether professional advisors are providing the advice clients need on philanthropy and whether they would benefit from doing more in that regard, it seems appropriate to provide an update on the developments in European cross-border giving in the last year.
Last year’s article described a number of developments which had taken place in European law in the field of ‘territoriality’ in relation to cross-border charitable giving. It ended with a reference to the Advocate General of the European Court of Justice (ECJ) having given his opinion in October 2008 in the case of Hein Persche v Finanzant Lüdenscheid (C318/07), which concerned the question of whether, for a tax deduction to be available for a donation to a charity, it was necessary for the charity to be established in the state which was being asked to give the tax deduction. In his opinion, the Advocate General followed the ECJ judgment in the case of Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften (C386/04), which had held that where favourable tax treatment was sought for the income and capital gains of a charity it was not necessary that it should be established in the state which was being asked to give the favourable tax treatment, so long as it was ‘equivalent’ to a charity established in that state and was established in one of the member states of the EU.
In January 2009, the ECJ gave judgment in the Hein Persche case and followed the Advocate General‘s opinion, holding that a donor should not be denied a tax deduction for a gift to a charity established in another EU member state simply because the charity was not established in the member state in which the donor was seeking the tax deduction. In other words, the concept of ‘territoriality’ was widened so that member states were expected to afford equivalent tax treatment not just to the income and gains of charities, but also to donations made to charities which were established in other member states if they would have given favourable tax treatment for the income and gains of, or a deduction for a gift to, that charity had it been established in their own state.
How, then, has this been received within Europe?
Having now lost two cases on the point in the ECJ, Germany has hardened its position, changing its law to introduce a ‘local benefit’ test which, while not directly precluding ‘equivalent’ treatment for the income and gains of (and gifts to) non-German charities, some have suggested is designed to ensure that, in practice, German tax advantages are only enjoyed by charities, and in respect of gifts to charities, which are German. Some German commentators have expressed doubt as to whether or not this rule will ultimately be found to comply with European law.
In November 2009, France was sent a ‘reasoned opinion’ by the European Commission (akin to those previously issued to the UK, Germany and Ireland), asking it to remove the discriminatory aspects of its law which restrict the availability of tax deductions for charitable donations to donations made to French charities. My firm had already seen cases in which French revenue officers had given ‘equivalent’ tax treatment to gifts to non-French charities and, although the United Kingdom (UK) and Ireland have yet to give any indication that they will comply with the ‘reasoned opinions’ sent to them (in 2006), it is understood that France now proposes to change its law to comply with the judgments of the ECJ.
Meanwhile, in September 2009, a Belgian Court had found in favour of the Great Ormond Street Hospital Children’s Charity in its claim to be accorded equivalent inheritance tax treatment for a testamentary gift made before the date with effect from which Belgium had agreed to afford other member states’ ‘equivalent’ charities the same inheritance tax treatment as Belgian charities. Interestingly, a few months before judgment was obtained in that case, following the intervention of the Belgian Ombudsman and without the need to launch Court proceedings, my firm (working with Belgian advisors) had been successful in persuading the Belgian tax authorities to treat a testamentary gift to three English charities, similarly made before Belgium had changed its law, in exactly the same way as a gift to a Belgian charity on the basis that the ECJ’s recent judgments overrode Belgian domestic law.
It is clear, therefore, that different states within Europe are taking different approaches: Belgium and France are liberalising their approach, falling into line with the Netherlands (which already permits non-Dutch charities to establish their credentials with the Dutch tax authorities); Germany is seemingly trying to find a solution which is unlikely, in practice, to see it having to give favourable tax treatment to charities from other member states or to those donating to them; while the UK and Ireland are continuing to take no action. It seems likely, however, that the UK, Ireland and the other states which have been holding out against the concept of what might be called ‘pan-European territoriality’ will ultimately have to accept the principles laid down in the Hein Persche case, perhaps adopting a similar approach to that of the Netherlands.
Meanwhile, how has the recession affected levels of philanthropic giving? It will come as no surprise to discover that when money is tight the ability and willingness to give of many donors reduces. Indeed, reports in both the United States and the UK indicate that the rate of cancellation of relatively small regular payments to charity has increased substantially over the last 12 months. At the other end of the spectrum, however, there is evidence of two, seemingly counter-intuitive, developments. First, reports suggest that a number of foundations, which might have been expected to be seeking to maintain the value of their own funds when times are hard, are in fact making more distributions to charities. Secondly, there is evidence that some substantial donors have increased their charitable giving, notwithstanding the economic downturn.
Fundamentally, the reaction of donors seems very much to depend upon their commitment to philanthropic giving. Whilst those who might have made relatively modest contributions to a charitable appeal or who have made regular, but small, contributions to charity may be cutting back on their philanthropy, many of those who have historically made more substantial donations and who may be seen as particularly committed to the causes they have supported have maintained their giving. At a basic level, one could say that this is not altogether surprising: those with the most money (who have historically made the biggest donations) might be expected to have suffered relatively less overall than others. As one donor reportedly put it: “my net-worth may have fallen from £1bn to £700m, but I have still got £700m!” What is interesting, however, is that it appears from anecdotal evidence which research reports have subsequently bolstered, that some of these more committed, high net-worth donors have actually increased their giving in the recession, recognising that the causes to which they are deeply committed are facing both an increase in demand for their services and a reduction in giving from those whose commitment is less or who can simply no longer afford to make the contributions they previously made.
What is certain is that, as times have become harder, donors have remained keen to ensure that the funds they make available are given tax-effectively and to projects and recipients who will use the money wisely; and it is, of course, here that professional advisors can help. Much research has been carried out over the last year into the question of how much advice is available to donors from their professional advisors in relation to philanthropic activity. In the UK at least, research indicates that there is less advice forthcoming from professional advisors on this subject than the desire of their clients to engage in philanthropic activity might suggest should be the case. As a result, a number of moves are now afoot to encourage professional advisors to engage with their clients to help them achieve their philanthropic aspirations and some advisors are beginning to understand the value to their own businesses of being able to help their clients in this respect, not just in relation to the direct fee income which advice of this nature may generate, but also in terms of the enhancement of the relationship between the advisor and the client.
At a time when the rules in relation to charitable giving are in flux, high net-worth donors remain keen to make a difference to those causes which they consider important and while not every professional advisor may be in a position to provide the advice which those donors need, those advisors who are may have an edge. The roles which professional advisors will play will vary and not all will wish, or be able, to provide detailed advice in relation to the structuring of gifts. However, even if you have to admit to your client that you cannot yourself provide the solution to a specific aspect of his or her philanthropic problem, it may well stand you in good stead if you can add, in the words of the UK Automobile Association’s advert: “but I know a man who can”.
In addition to providing advice to a number of household name charities and charities with City livery connections on governance and operational issues, Clive Cutbill leads the philanthropy practice at Withers Worldwide, advising both charities and donors in relation to tax-efficient giving and funding. His practice extends beyond the domestic to the cross-border context and encompasses advice on venture philanthropy, social investment and the structuring of transactions involving charities and others so as to deliver maximum social benefit. Clive acted in two leading High Court cases concerning trustees' powers and duties: Hillsdown Holdings plc v. Pensions Ombudsman (1996); and Public Trustee and Anor v. Cooper and Ors (1999) and has been acknowledged as a major contributor to the debate concerning the powers of trustees to adopt a socially responsible approach to the investment of their funds. He is the firm's nominated officer for money laundering reporting purposes and, as chair of the STEP Anti-money Laundering Task Force, has been involved in discussions with HM Treasury, MEPs, the European Commission and the Financial Action Task Force of the OECD regarding the fight against money laundering and terrorist financing. In the latter role, he was a recipient of an outstanding achievement award at the STEP 2007 Private Client Awards for his role in securing key amendments to the Money Laundering Regulations 2007 at draft stage. His combination of knowledge and experience in the fields of trust and charity law, on the one hand, and money laundering and terrorist financing issues, on the other, has been described as ‘unique'.