The International Journal
of Not-for-Profit Law

Volume 1, Issue 2, December 1998

I. Introduction

As Chinese nonprofit organizations seek to finance new initiatives and expanded programs, one option is to seek increased support from foreign funders. This paper examines the potential for increased funding from U.S. non-governmental funders — principally foundations and U.S. corporations doing business in China.

For many years, U.S. tax laws have provided strong incentives for making charitable contributions. Responding to these incentives, many wealthy individuals and families have established large foundations that make substantial grants in support of a broad range of charitable programs. In 1995, there were approximately 40,000 U.S. grant-making foundations with total assets of approximately $230 billion. These foundations made total grants of $12.3 billion, of which 4%– or approximately $800 million– went to support charitable programs and organizations outside the United States or for international activities of U.S. charities.2

The U.S. foundation sector has experienced rapid growth in recent years, and that growth is expected to continue over the next decade. Between 1985 and 1995 – the most recent period for which comprehensive data are available – the inflation-adjusted value of foundation assets increased by 122% and the inflation-adjusted value of foundation grants increased by 104%.3 Reflecting the exceptionally strong performance of the equity markets, the rate of growth in foundation assets and grants since 1995 has been even more rapid.

The Foundation Center, the principal source of data on U.S. grant-making foundations, divides foundations into three categories: independent foundations, corporate foundations, and

community foundations. In 1995, independent foundations accounted for 77% of total foundation giving, while corporate foundations accounted for 14% and community foundations accounted for 9%.4 Because community foundations typically concentrate their giving on local charitable activities and rarely fund international programs, this analysis concentrates on independent foundations (Section II) and corporate foundations (Section III).

II. U.S. Independent Foundations

A. Current Giving by U.S. Foundations in Support of Chinese Nonprofits

The Foundation Center reports the following information on grants by U.S. independent foundations to support charitable activities in, or related to, China:

Table 1: Total Giving by U.S. Independent Foundations for Charitable Activities in, or Related to, China5

	Number of Grants	Average grant size	Total amount of grants
1994	224	$100,202	$22,445,394
1995	289	$93,955	$27,153,025
1996	209	$134,795	$28,172,317
Total	722	$107,715	$77,770,736

For more detailed information on each of these grants, see Appendix 1.

Of these grants, $31,095,849 (39.5%) went directly to Chinese nonprofits or other Chinese recipients. Virtually all of the remaining $47,623,887 in grants were made to U.S. charities to support activities in, or related to, China. This widespread use of U.S. charities to serve as funding intermediaries for activities in China reflects certain U.S. legal restrictions on U.S. foundations (see section II.B.3, below).

The approximate allocation of these grants among various fields of charitable activity was as follows:6

Table 2: Independent Foundation Grants by Subject Area7

	Value of grants	Percentage of total
Education	$33,724,782	43.36%
Health	$18,375,954	23.63%
Environment	$4,809,824	6.18%
Economic development	$3,615,030	4.65%
Social services	$1,447,000	1.86%
Religion	$356,000	0.46%
Other	$15,441,446	19.86%

Over the period from 1994-96, the following 15 foundations provided the greatest funding for charitable activities in, or related to, China:

Table 3: Largest U.S. Foundation Funders of Charitable Activities in or Related to China: 1994-19968

Foundation	Amount of grants	% of total grant $	Cumulative percentage
Ford Foundation	$23,081,628	29.32%	29.32%
China Medical Board of New York	$13,019,000	16.54%	45.86%
The Freeman Foundation	$9,364,500	11.90%	57.76%
The Starr Foundation	$8,863,000	11.26%	69.01%
The Rockefeller Foundation	$7,751,820	9.85%	78.86%
The Henry Luce Foundation	$7,353,250	9.34%	88.20%
John D. and Catherine T. MacArthur Fdn.	$3,209,650	4.08%	92.28%
United States-Japan Foundation	$639,471	0.81%	93.09%
Thrasher Research Fund	$628,722	0.80%	93.89%
W.K. Kellogg Foundation	$496,000	0.63%	94.52%
The Bolthouse Foundation	$475,000	0.60%	95.12%
The John Merck Fund	$325,000	0.41%	95.54%
Rockefeller Brothers Fund	$280,000	0.36%	95.89%
The R.J. Maclellan Charitable Trust	$268,000	0.34%	96.23%
Carnegie Corporation of New York	$250,000	0.32%	96.55%
Total	$76,005,041	96.55%	96.55%

As this table makes clear, the largest funders account for a very large proportion of the total U.S. foundation grants in support of Chinese charitable activities. The largest single funder – the Ford Foundation – alone accounted for 29% of total grants. The top seven foundations accounted for 77% of total U.S. foundation grants. For more detailed information on each of the top 15 foundations, see Appendix 2.

B. Strategies for Increasing U.S. Foundation Support for Chinese Nonprofits

Chinese nonprofits that are interested in obtaining funding from U.S. foundations would be well-advised to consider the following strategies.

1. Identifying the U.S. foundations most likely to fund particular activities. A Chinese nonprofit organization seeking funding from U.S. foundations should begin by identifying the U.S. foundations whose funding priorities most closely correspond to the Chinese nonprofit’s funding needs. Detailed information on the funding priorities of many major U.S. foundations is available on the internet. Where available, worldwide web addresses for the largest U.S. funders of Chinese charitable activities are listed in Appendix 2.

In addition, detailed information on all significant U.S. grant-making foundations is available from the Foundation Center, a nonprofit information clearing house. The Foundation Center publishes numerous books and surveys about U.S. foundations. Much of this information can be obtained through the Foundation Center’s worldwide web page (https://www.fdncenter.org). The Foundation Center’s mailing address is: Foundation Center, 79 Fifth Avenue, New York, NY 10003-3076. The Center’s phone number is: 212 620-4230.

2. Developing relationships with foundation staff. Most large U.S. foundations making grants to Chinese nonprofits will have one or more program officers with specific responsibility for grants in China.

Once a Chinese nonprofit has identified a U.S. foundation as a potential funder, the Chinese nonprofit would be well-advised to establish a relationship with the foundation’s program officer responsible for its grants in China. The first step should be to contact the foundation — by mail, e-mail, or telephone — and provide general information about the nonprofit organization’s programs and funding. This may lead naturally to a dialogue about possible areas of mutual interest between the Chinese nonprofit and the foundation that could become the focus for a foundation grant. Chinese nonprofit organizations that are prepared to take a disciplined, long-term approach to this cultivation process are most likely to be successful.

3. Developing partnerships with U.S. charities that may assist in obtaining foundation funding. As noted in section II.A, above, only about 40% of total U.S. foundation grants in support of activities in China flow directly to Chinese recipients. The majority of grants are made to U.S. charities that, in turn, use the grant funds to support organizations and/or programs in China. U.S. foundations’ frequent preference for using U.S. charities as funding intermediaries reflects both legal and programmatic considerations.

Understanding the U.S. legal considerations requires a brief explanation of the U.S. legal framework governing charities. U.S. law divides charities into two classes: private foundations and public charities. Public charities include schools, hospitals, churches, and any other charities that receive their financial support from a broad group of donors or patrons. By contrast, private foundations typically do not conduct direct charitable activities (e.g., they do not operate schools, hospitals, or churches) and receive their financial support from a single individual or family.

Under U.S. law, when a foundation makes a grant to an organization that does not qualify as a public charity, the foundation must exercise a significantly higher degree of supervision over the use of the grant funds than is required for grants to public charities.

If a non-U.S. nonprofit can demonstrate that it would qualify as a public charity if it were subject to U.S. law, a U.S. foundation is entitled to treat the foreign entity as a public charity for purposes of the foregoing rule. However, the process required for a non-U.S. nonprofit to establish its public charity equivalency is somewhat burdensome and, consequently, relatively few non-U.S. organizations avail themselves of this process.9

As a result of these legal rules, U.S. foundations interested in supporting charitable activities outside the U.S. often prefer to make a grant to a U.S. public charity that can then work in collaboration with one or more non-U.S. charities to conduct the grant-supported activities.

In some cases, these legal considerations are also reinforced by a programmatic considerations. Specifically, a U.S. foundation with limited experience in a particular international context may prefer to work through a more experienced U.S. public charity. Thus, for example, a U.S. foundation with limited experience in funding programs in China might well prefer to work through a U.S. public charity that has a long history of operations in China, rather to provide funding directly to Chinese nonprofits.

Given these considerations, Chinese nonprofit interested in attracting U.S. foundation support should consider establishing programmatic partnerships with one or more U.S. public charities that could assist in developing an effective funding proposal.

4. Developing effective funding strategies and proposals. Finally, Chinese nonprofits should be aware of the resource materials available to assist in developing effective funding strategies and proposals. The Foundation Center (see Section III.B.1, above) publishes a number of effective handbooks, including: The Foundation Center’s Guide to Grantseeking on the Web; The Foundation Center’s Guide to Proposal Writing; The Foundation Center’s User-Friendly Guide: A Grantseeker’s Guide to Resources.

III. U.S. Corporate Foundations

Most large U.S. corporations also have charitable giving programs. The Foundation Center reports that approximately 2,000 U.S. corporations have established corporate foundations. These are separately incorporated charitable foundations that receive their funding from the business corporation and use that funding to make grants to support a range of charities. In 1995, these corporate foundations made total grants of $1.7 billion.10 In addition, approximately 700 U.S. corporations have direct charitable giving programs –that is, these business corporations make charitable contributions directly in addition to, or in lieu of, making contributions through a corporate foundation.11

A. Current Giving by U.S. Corporations in Support of Chinese Nonprofits

1. Corporate Foundations. Analysis of Foundation Center data indicates that charitable contributions by U.S. corporate foundations for charitable activities in, or related to, China equaled only about 1.2% of the amount of the China-related grants made over the same period by U.S. independent foundations. More specifically, the Foundation Center reports that during 1994 to 1996, 13 U.S. corporate foundations made 37 grants, totaling slightly less than $1 million to support charitable activities in, or related to, China. Annual totals were as follows:

Table 4: Total Giving by U.S. Corporate Foundations for Charitable Activities in, or Related to, China12

	Number of grants	Average grant size	Total amount of grants
1994	8	$20,000.00	$160,000
1995	18	$29,166.67	$525,000
1996	11	$24,000.00	$264,000
Total	37	$73,166.67	$949,000

For more detailed information on each of these grants, see Appendix 3.

Of these grants, (39.5%) were made directly to Chinese nonprofits or other Chinese recipients, with the balance going primarily to U.S. public charities.

The approximate allocation of these grants among various fields of charitable activity was as follows:

Table 5: Corporate Foundations Grants by Subject Area13

	Value of grants	Percentage of total
Education	$365,000	38.46%
Health	$109,000	11.49%
Economic development	$50,000	5.27%
Environment	$10,000	1.05%
Social services	$0	0.00%
Religion	$0	0.00%
Other	$415,000	43.73%

Over the period from 1994-96, total China-related grants for each of the U.S. corporate foundations making such grants were as follows:

Table 6: U.S. Corporate Foundations Funding of Charitable Activities in or Related to China: 1994-1996

Foundation	Amount of grants	% of total grant $	Cumulative percentage
American Express Foundation	$190,000	20.02%	20.02%
The Coca-Cola Foundation Inc.	$140,000	14.75%	34.77%
GE Fund	$110,000	11.59%	46.36%
AT&T Foundation	$100,000	10.54%	56.90%
Ford Motor Company Fund	$94,000	9.91%	66.81%
Amoco Foundation Inc.	$87,000	9.17%	75.97%
Aetna Foundation	$80,000	8.43%	84.40%
Rockwell International Corp. Trust	$50,000	5.27%	89.67%
RJR Nabisco Foundation	$30,000	3.16%	92.83%
Alcoa Foundation	$25,000	2.63%	95.47%
Texaco Foundation	$23,000	2.42%	97.89%
BankAmerica Foundation	$10,000	1.05%	98.95%
Chrysler Corporation Fund	$10,000	1.05%	100.00%
Total	$949,000	100.00%	100.00%

2. Direct Corporate Giving Programs. As noted above, many corporations make charitable contributions directly rather than through a corporate foundation. Available data indicate that the following corporations provided support for charitable activities in, or related to, China through direct corporate giving programs:

Table 7: U.S. Corporations With Direct Corporate Giving Programs Supporting Charitable Activities in, or Related to, China14

Amoco		General Motors
Johnson & Johnson		Monsanto
Proctor & Gamble		Rockwell
United Dominion

The Foundation Center’s National Directory of Corporate Giving does not contain data on the number, type, or amount of the grants provided by these donors for projects in, or related to, China.

3. U.S. Corporations With Largest Direct Investments in China. As the following table indicates, the Foundation Center’s database includes grants by only five of the ten U.S. corporations with the largest direct investment in China. The author suspects that given the scale of their investment in China, the remaining corporations are also making significant contributions to China-related charities through mechanisms not captured by the Foundation Center database.

Table 8: U.S. Corporations With Largest Direct Investment In China15

Corporation	Amount of Investment (millions)	Nature of Investment in China	Amount of Charitable Contributions in China16
Motorola	$1,200	Several Joint Ventures,$500 million semiconductor plant	no data
Arco	$625	Opened China’s largest off-shore natural gas field	no data
Coca Cola	$500	Numerous bottling plants	$140,000
Amoco	$350	Oil project on South China Sea	$87,000
General Motors	$350	11 joint ventures and 4 wholly-owned plants	*17
Ford	$250	Several auto parts facilities	$94,000
United Technol.	$250	Elevator and air conditioner production, other joint ventures	no data
Pepsi	$200	Numerous bottling plants and fast food restaurants	no data
Hewlett-Packard	$200	Computer production	no data
General Electric	$165	Numerous joint ventures	$110,000
Lucent Technol.	$150	Seven joint ventures	no data

Given the scope of their Chinese operations, all of these corporations should be considered prospects for increased funding of charitable activities in China.

B. Tax Incentives for Charitable Contributions by U.S. Corporation in Support of Charitable Activities in China

1. Existing U.S. tax incentives for corporate charitable contributions. Under U.S. tax law, U.S. corporations are permitted to reduce their taxable income by the amount of their charitable contributions (up to 10% of the corporation’s taxable income) to U.S. charities.

A simple example illustrates the financial effect of this incentive. Consider a corporation with U.S. taxable income of $100,000,000. The corporation is subject to a U.S. tax rate of 35%, so that the U.S. tax on the $100,000,000 of taxable income would be $35,000,000. If the corporation makes charitable contributions of $5,000,000, it is entitled to deduct this amount from its taxable income, thereby reducing its taxable income to $95,000,000 and its tax to $33,250,000 (35% x $95,000,000). In other words, since the charitable deduction reduces the corporation’s tax liability by $1,750,000, the after-tax cost of the $5,000,000 contribution is only $3,250,000.

A corporation’s right to deduct charitable contributions from U.S. taxable income is subject to one important limitation: the recipient must be a U.S. charity. However, provided that the U.S. charitable recipient is a corporation (rather than a trust or unincorporated association), the recipient may use the corporate contribution to support charitable activities outside the U.S. Given these rules, corporations wishing to support charitable activities in China will want to provide this support through a U.S. charity. For most large U.S. corporations, the U.S. charitable intermediary will be the corporation’s own corporate foundation. Corporations that do not have a corporate foundation will have to use another U.S. charitable intermediary.

2. U.S. tax incentives for corporate sponsorships and joint ventures with charities. U.S. tax law also permits U.S. corporations to claim business expense deductions for expenses related to corporate sponsorship and joint venture arrangements with charities. For example, a corporation sponsoring scientific research activities at a university (including at non-U.S. universities) in return for ownership rights in the resulting technology is entitled to a business expense deduction for its sponsorship payments. Similarly, a U.S. corporation that agrees to be a corporate sponsor of a sporting tournament or educational conference could likewise deduct its sponsorship payments in determining its U.S. tax liability.

3. The effect of Chinese tax incentives on charitable contributions by U.S. corporations. Chinese tax law generally allows both domestic and foreign corporations doing business in China to claim a tax deduction for charitable contributions in determining their Chinese tax liability. The deductions may not exceed 3 percent of the corporation’s Chinese taxable income. The U.S. experience strongly supports the desirability of such a tax incentive in encouraging increased corporate charitable contributions. In the context of this analysis, it is important to recognize that the principal role for this tax deduction should be to encourage increased charitable contributions by Chinese businesses. As explained below, the effect of the Chinese charitable tax deduction on giving by U.S. corporations and their subsidiaries is likely to be less significant because of the interaction between the Chinese deduction and the U.S. foreign tax credit. On the other hand, as also explained below, U.S. corporations can structure their China-related charitable contributions so that they produce significant U.S. tax savings. In other words, U.S. corporations have a strong U.S. tax incentive for making charitable contributions, including contributions to China-related charities.

The interaction between the Chinese charitable tax deduction and the U.S. foreign tax credit can be briefly explained as follows. A U.S. corporation with income from business operations in China (whether carried on directly or through a subsidiary) receives a credit against its U.S. tax liability for the taxes imposed by China on China-source income. The purpose of this credit is to prevent the U.S. corporation from being taxed twice – once by China, and again by the U.S.—on the same China-source income.

This rule can be illustrated with a simple example. Assume that a U.S. corporation earns $10,000,000 in income from business activities in a Chinese enterprise zone where the applicable Chinese tax rate is 24%. The corporation pays Chinese tax of $2,400,000. The U.S. corporation must also include this $10,000,000 of China-source income in computing its U.S. tax liability on its worldwide income. The U.S. tax rate is 35%, resulting in a U.S. tax liability of $3,500,000 before taking into account the U.S. foreign tax credit rules. However, under these rules, the corporation is entitled to a credit against its U.S. tax liability equal to the $2,400,000 of Chinese tax paid. Accordingly, the foreign tax credit reduces the corporation’s U.S. tax on the China-source income to $1,100,000.18

An important implication of the U.S. foreign tax credit is that a provision of Chinese tax law – e.g. the charitable contribution deduction — that reduces a U.S. corporation’s Chinese tax on China-source income may result in an equal increase in the corporation’s U.S. tax on that income. Assume, for example, that China adopted a corporate charitable contribution rule similar to the U.S. rule and that the U.S. corporation in the foregoing example made $1,000,000 of charitable contributions in China. Under the new Chinese tax rule, the corporation would be able to deduct the $1,000,000 in contributions in determining its Chinese tax liability, thereby reducing its Chinese taxable income to $9,000,000 and its Chinese tax to $2,160,000. However, this reduction in the corporation’s Chinese tax liability would produce an equal reduction in the corporation’s U.S. foreign tax credit. The result would be an increase in U.S. tax liability from $1,100,000 to $1,340,000 – precisely offsetting the reduction in Chinese tax.19

In this regard, it is important to note that some major industrial countries employ a fundamentally different approach to the tax treatment of foreign income that – unlike the U.S. foreign tax credit system – would not have the possible effect of negating a Chinese charitable tax incentive.20

Given the difficulty in structuring a Chinese charitable tax incentive that would not be negated for U.S. corporations by the U.S. foreign tax credit, the Chinese government might want to consider other types of incentives for corporate charitable contributions. One possibility would be for the Chinese government to establish a matching grant system under which the government would agree to make a matching payment to any Chinese charity that receives a contribution from a foreign corporation doing business in China. For example, a 30% matching payment for all foreign charitable contributions would be roughly equivalent to allowing a charitable tax deduction against a 30% tax rate, but would not be offset by the U.S. foreign tax credit.

C. Strategies for Increasing U.S. Corporate Support for Chinese Nonprofits

The strategies available to Chinese nonprofits for increasing support from U.S. corporations include those outlined above with respect to non-corporate foundations (see section II.B, above).

Key contact persons at the corporate foundations that support China-related charitable activities are included in Appendix 4.

In addition, Chinese nonprofits interested in attracting support from U.S. corporations would be well-advised to cultivate relations with these corporations’ senior business executives in China, since these officials are likely to have a major role in shaping corporate giving decisions. Where appropriate, these discussions should include exploration of possible joint venture and corporate sponsorship relationships as well as charitable contributions.

IV. Conclusion

U.S. foundations and corporations have already displayed a significant interest in funding charitable activities in, or related to, China. Assuming that relations between China and the United States continue to improve and that the U.S. business presence in China continues to expand, U.S. charitable support for Chinese nonprofits should likewise continue to grow.

The author sincerely hopes that the information presented in this paper will be of assistance to Chinese nonprofits as they seek to strengthen their relations with, and expand their support from, U.S. funders.

Notes

1This paper was prepared for presentation to a symposium on Community Resources and Volunteers to be held in Shanghai on November 11-12, 1998. The sponsoring organizations are the Shanghai Federation of Social Sciences, the Shanghai Volunteer Association, the Shanghai Institute of Community Development, and the YMCA of China. The author gratefully acknowledges the assistance of April Adams, Daniel Hanks, and Sean O’Connell in the preparation of this paper.

2Foundation Giving, The Foundation Center, 1997, at viii-ix.

3Foundation Giving, at 10.

4Foundation Giving, at viii.

5Data from FC Search: The Foundation Center’s Database on CD-ROM.

6This categorization was prepared by the author based on the data contained in the Foundation Center’s FC Search data base to provide a rough sense of the allocation of China-related grants among program areas.

7Data from FC Search: The Foundation Center’s Database on CD-ROM.

8Data from FC Search: The Foundation Center’s Database on CD-ROM.

9The relevant U.S. requirements, and the process through which a non-U.S. nonprofit can establish its “public charity equivalency” are explained in detail in John A. Edie, Beyond our Borders: A Guide to Making Grants Outside the U.S. The Council on Foundations, 1994, at pp. 7-8 and Appendices 6-8.

10Foundation Giving, 40.

11Id., For detailed information on corporate giving, see the National Directory of Corporate Giving, Fifth ed., Foundation Center, 1997.

12Data from FC Search: The Foundation Center’s Database on CD-ROM.

13Data from FC Search: The Foundation Center’s Database on CD-ROM.

14Data from National Directory of Corporate Giving.

15Information on the scale and nature of direct investments is from the Trade Information Center, 1998 Investment Climate Statement (last update July 8, 1998), https://www.ita.doc.gov/ita.

16The table presents information on charitable contributions reported in the Foundation Center’s database. As noted above, given the scope of their investments in China, these corporations may well be making additional contributions to China-related charities through mechanisms not captured by the Foundation Center database.

17The National Directory of Corporate Giving indicates that General Motor’s direct corporate giving program provided at least some support for charitable activities in, or related to, China. However, the Directory does not provide any information on the amount of this support.

18This simple, two-country example involving direct investment by a U.S. corporation is provided to illustrate the basic concept of the foreign tax credit, but greatly over-simplifies the tax situation faced by the typical U.S. multi-national corporation. Such corporations will typically have income from a number of countries, some with tax rates above the U.S. rate of 35% and some with tax rates below the U.S. tax rate, some earned directly and some through affiliates. To determine the amount of its U.S. foreign tax credit, the corporation must first identify its worldwide foreign tax rate on foreign income. If this worldwide rate is less than or equal to the U.S. rate on that income, the corporation receives a U.S. foreign tax credit for all of its foreign taxes. On the other hand, if the corporation’s worldwide rate exceeds the U.S. tax rate, the corporation’s U.S. foreign tax credit is reduced by the amount of its foreign taxes attributable to the excess of its worldwide rate over the U.S. rate.

19For a corporation with a worldwide tax rate above the U.S. rate, a reduction in foreign taxes (e.g., as the result of creation of a Chinese charitable contribution deduction) would not automatically reduce the corporation’s U.S. foreign tax credit since the amount of the corporation’s U.S. foreign tax credit is subject to the limitation described above. Under such circumstances, the Chinese tax incentive would, as intended, decrease the corporation’s Chinese tax without producing an offsetting increase in its U.S. tax.

20Generally speaking, countries use one of two models to avoid double taxation of foreign source income: either the foreign tax credit system described above (used by the U.S., the United Kingdom, and Japan, among others) or the so-called “exemption system” (used, for example, by Germany and France). Under a pure exemption system, the “resident country” (i.e., the country in which the foreign investor is based) exempts from its tax any income taxed by the “source country” (i.e., the country in which the income is earned). Unlike a foreign tax credit system, an exemption system would not negate the effect of a Chinese charitable tax incentive by producing an offsetting increase in resident country tax.

Appendices

Editors Note: The appendices were not reproduced on this on-line version, however they are available by request in paper form (shipping and handling fees may apply).  Send an e-mail to journal@icnl.org.

1. List of grants by U.S. independent foundations during 1994-96 for charitable activities in, or related to, China.

2. Information on largest U.S. independent foundations providing support for charitable activities in, or related to, China.

3. List of grants by U.S. corporate foundations and corporate giving programs during 1994-96 for charitable activities in, or related to, China.

4. Information on U.S corporate foundations and corporate giving programs providing support for charitable activities in, or related to, China.