A possible tax efficient swap mechanism for charity
I had an idea a while ago, which sounded simple to me, but searching with certain keywords did not yield appropriate results, so am presenting it for discussion to LW . Please inform me if something like this is already in existence. Please inform if I need to cross post it on effective altruism forum also, or they share enough users with LW and it need not be repeated.
Introduction
Two persons A, B living in different tax jurisdictions I and J respectively, want to contribute to organizations M and N qualifying for tax exemption in the other person’s jurisdiction. i.e. M qualifies in J and N qualifies in I. For the purpose of this demo, lets consider they intend to contribute the same amounts.
They “swap” their charities and produce receipts to the effect from the respective organizations.i.e. A contributes to N and B contributes to M.
This helps them gain 10% to 20% more money when compared to contributing to their preferred charities which do not qualify.
So, the idea is to create a website where people can post such an intent, to contribute to cross-national charities and can reliably present receipts that will be acceptable to all concerned.
The main uses i envisage for such swaps would be science supporters in the developing world wanting to contribute to research happening in the developed world swapping with EA’s wanting to gain a bigger bang for their buck in the developing world. This potentially reduces the need for a lot of charities to seek out tax exemption in multiple jurisdictions.
Avenues for further research
Question on the basic idea
Do both charities have to be acceptable to both donors or are neutral and maybe even “hostile” swaps possible? How much does that complicate matters
A certain cut of the proceeds seems to be the simplest for the website to operate, but will it be acceptable to the users?
Might this be construed as being illegal in certain jurisdictions, after all, it is a tax avoidance scheme, to be honest.
Logistics questions
The 1:1:1:1 case for person to jurisdictions to causes to “the time of swap” is the simplest. There are many possible complications which can allow more charity to be funneled, but require the website hosts to be exposed to non-trivial amounts of risk. Example in one exchange, more dollars are offered for charity than euro-equivalents while in another swap, more euro-equivalents are offered compared to dollars. This can balance, but it is more complicated.
Do the accounts need to “balance”? Will a non 1:1 ratio be acceptable for certain supporters of causes?
Foreign exchange fluctuations affect amounts of money donated and may cause some unnecessary heartburn in some cases.
Times of feeling charitable may wary and may prevent markets from clearing. Christians may feel more charitable near Christmas or Easter and Muslims during Ramadan.
Might this require all charities to get themselves a digital signature? What are the other avenues to getting a reliable receipt from charities?
If both payments are routed through the website/entity, then might unnecessary forex changes remove a lot of value? Could crypto-currency style atomic swaps help or would they introduce unnecessary complexity that people would rather not be bothered with.
Might it complicate the relationship of donors with charities to the extent that the gain is lost in extra cost to reach out?
Do you have some examples where this situation exists (two charities with different government acceptance in two jurisdictions that have US-style tax incentives for charities and a reasonably large donor base of wealthy individuals)?
I suspect it’s rare. Further, I suspect most giving is of the feel-good rather than informed altruism form, and tax effects are unlikely to be sufficiently motivating to the donors to go through this contortion.
I’d also expect to be harassed by officials on both sides who take this “transparent attempt at bypassing our regulations” pretty seriously.
I think lots of UK/US pairs will satisfy this, e.g. FHI and MIRI. (I think I (in the UK) can make tax-deductible donations to FHI, but not MIRI; and I think Americans have it the other way around.)
Americans can make tax-dedutible donations to FHI through Americans for Oxford: http://www.fhi.ox.ac.uk/support-fhi/
CEA then; it’s currently only tax-deductible if you give via an intermediary that takes 5%.
I’m pretty sure I know of a case where this is done with these exact charities.
I think most charities are tax deductible only in their own countries. Oxford’s cross country deductiblity is more the exception than the rule. To be specific, I’ll not get a tax deduction in India if I contributed to fhi. But if I swap with an englishman who wanted to contribute to the ramakrishna mission or child relief and you (indian charities) then we both benefit.
I agree on potential regulatory issues. That’s why I wanted more opinions.
I agree with your assessment. Nonetheless it appears to be an idea that is new and could in specific circumstance be workable.
This seems like an interesting idea. We could use this thread to test if the idea is worth pursuing further… anyone wishing to donate to a charity they can’t deduct donations for from their taxes could announce this intention and we could see if swap opportunities arise.
I’ve been donating to CFAR and MIRI, and in fact a CFAR donation of ~$300 is on my todo list currently. If anyone wants to swap for a UK org that I can gift aid (so they get 25% extra), let me know.
A nice idea likely with other, more general opportunities for legal jurisdiction swaps. It’s probably quite handy to live near a border.
I sort of do this with Amazon. Living in Washington State, I’ll often get taxed, so I’ll look for out of state sellers instead.
This is a good idea, though not a new one. Others have abandoned the idea of a formal system for this on the grounds that:
1) It may be illegal 2) Quite a few people think it is illegal or morally dubious (whether or not it is actually illegal or immoral)
It would be insane to proceed with this without confirming (1). If illegal, it would open you up to criminal prosecution, and more importantly, seriously hurt the movements you are trying to help. I think that whether or not it turns out to be illegal, (2) is sufficient reason to not pursue it. It may cause serious reputational damage to the movement which I’d expect to easily outweigh the financial benefits.
I also think that the 10% to 20% boost is extremely optimistic. That would only be achieved if almost everyone was using it and they all wanted to spend most of their money funding charities that don’t operate in their countries. I’d expect something more like a boost of a few percent.
Note that there are also very good alternatives. One example is a large effort to encourage people to informally do this in a non-matched way by donating to the subset of effective charities that are tax deductable in their country. This could get most of the benefits for none of the costs.
Thanks, Toby. I expected that the legal risks would be quite an issue. Point noted. I had not expected this to be a new idea as well, after all it seemed too simple. I guess a more informal means is good for now. Hope the EA forum has such a place to make this discussion.
You don’t even need to have both people need tax deductibility, all you need is comparative advantage. Suppose we both want to donate $100, but to different charities, and donations to my charity are not tax deductible in my jurisdiction, but both are in yours. And suppose my tax rate is 20%. If I instead give $100 to your charity and $10 to mine, and you give $90 to my charity, then both charities still end up with $100, but you’re only out $90. I’m out $110, but $100 of that is tax deductible, so I get $20 back, so I’m out $90.
I wonder about the possibility of coordinating this behind the backs of hostile regulators. If you make the deals anonymously, you need a way of verifying that the other party follows through. Maybe you arrange the deal on an anonymous clearinghouse, use encrypted communication to agree on an irregular amount, both escrow (at least) that amount, show each other the receipts (you don’t need to conceal your identities from each other, just from observers) with the odd amount serving as verification that it’s your transaction, then release the escrowed funds?
No doubt there are less amateurish crypto-transaction designers than I reading this who can weigh in.
There are lots of ways, but if you need to go crypto-geek in order to avoid charges of tax evasion for you charitable giving, I think you already lost.