Chapter 6
Staffing Foreign Operations: Employees and Volunteers
In Chapters 4 and 5, we explored a variety of alternatives for structuring foreign operations, and relationships among legal entities in multiple countries. Once you have decided to operate programs in one or more foreign countries, whether through branches or separate legal entities, you will need to consider how to staff those operations. Will you send U.S. staff to work for short, medium, or long-term assignments in a foreign country? Will you hire locally? Will you rely on volunteers, either U.S. or foreign?
The answers to these questions have consequences for your organization and the individuals who work for you. This chapter delves into some rather complex legal issues in an effort to help guide you in making decisions that will facilitate the most efficient use of your resources. If you find yourself getting lost in the weeds, keep in mind that the paramount concern in staffing foreign operations is that there be sufficient oversight to ensure that your scarce resources are being used for the intended purposes.
6.1 Staffing Foreign Operations: Will You Send U.S. Staff or Hire Locally?
If your organization is operating programs directly in a foreign country, you may need or want to have staff or volunteers who are based there, rather than trying to manage programs remotely. If you have decided to form a separate legal entity in a foreign country you will most likely need at least one employee. The next question will be whether to send U.S. staff, hire locally, or combine U.S. and local personnel.
Some factors to consider in deciding whether to send U.S. staff or hire locally are:
U.S. staff may have a better understanding of your organization's culture. Local staff may have a better understanding of the local culture. If you are operating in a country where corruption is a way of life, it may be difficult to find people who operate ethically. It can be very expensive to send U.S. staff to work in a foreign country. Some countries require that you hire locally, or make it very difficult to obtain visas.The case study of SightLife, in Chapter 1, shows how one organization balanced these considerations by hiring an India country manager who was an Indian national with education and work experience from the United States.
Some organizations opt to send U.S. staff to a foreign country for an initial period in order to establish a program while finding and training the right people. This can be a practical way of starting up a foreign program, and it may also satisfy certain legal requirements. For example, in order to register in Uganda, an organization must submit a plan to replace non-Ugandan employees with Ugandans.1
6.2 Sending People Overseas: Initial Considerations
Work Permits and Visas
The first question you need to ask is whether the country in which you intend to operate admits U.S. individuals to work and, if so, under what conditions. The answer may vary depending on the nature of the job and the length of time they will stay. Obtaining work visas can be costly and time-consuming, so start looking into this early.
Do Foreign Labor Laws Apply?
Once you've determined that you can send employees to work in a particular country, you will need to know whether local labor laws apply to them and, if that is the case, you must then understand the applicable requirements and restrictions. For example, are there restrictions on working hours, required paid or unpaid leave, and/or required employer-funded benefits? Will you be required to pay severance if you lay people off? Is it even possible to lay people off? The answers to these questions may differ depending on whether you are operating through a branch or a separate legal entity.
If you are going to hire from within a foreign country as well as sending staff who are U.S. citizens, you should consider whether disparities in pay and benefits will create workplace friction and/or legal violations.
Minimize Culture Shock (or Worse)
Americans who go to work in foreign countries are not always prepared for major differences in cultural norms and legal regimes. These differences can be vast when people go to work in developing countries. The consequences of sending people unprepared can include embarrassment to your organization and loss of credibility that undermines all of the good work you are trying to do. Even worse, your staff could find themselves in trouble with the law, or even in jail, without realizing they have committed crimes. Some transgressions that would not be serious in the United States are very serious in other countries.
In addition, Americans tend to have an expectation that their individual rights will be respected in ways that do not necessarily hold up in foreign countries. We have all seen Miranda warnings on TV, and Americans are sometimes unpleasantly surprised when a foreign country does not afford them the rights they expect. For example, in some countries, if government authorities merely suspect wrongdoing, employees may be subjected to questioning, and office files may be confiscated.
The message here is, you can avoid a host of problems, small and large, by making sure that before you send staff or volunteers to a foreign country they are trained in basic cultural and legal norms. Once in that country, they must be well supervised.
6.3 If You Send U.S. Employees to Work in a Foreign Country, Will They Be Taxed There?
Individuals who spend extended periods working in a foreign country can become subject to individual income tax in that country. The first question to ask is whether there is an income tax treaty between the United States and the country in which your employees are working.2 If there is no treaty, the laws of that country will determine whether your employees are subject to tax.
Does a Tax Treaty Apply?
If a treaty is in effect between the United States and the foreign country in which an employee is working, the specific provisions of the treaty will determine what your employees can do without becoming subject to individual income tax in that country, assuming that the treaty applies to a particular individual. Many treaties allow an individual to work in a foreign country for up to six months before being taxed in that country.
In most cases, an individual will be able to take advantage of a treaty only if all of the following conditions are met:
The individual is working for a U.S. entity and not a legal entity formed in the foreign country. The individual is not working for a branch of a U.S. entity that is registered in the foreign country. In some countries, however, the treaty may apply if the individual is paid by the U.S. headquarters office, even though a foreign branch has been registered.3 The individual meets the definition of a U.S. resident under the applicable treaty. An individual who is a U.S. citizen or resident alien (described in section 6.4) is generally eligible to take advantage of a treaty when working in a foreign country. Note, however, that a U.S. citizen who establishes residency in a foreign country may not necessarily be eligible for treaty benefits that apply to U.S. tax residents. Many treaties do not automatically apply benefits to all U.S. citizens, but rather, an individual must also be considered to have closer ties to the United States, determined by various factors such as whether the individual maintains a permanent home in the United States while living in a foreign country. It's important to understand the specific terms of the applicable treaty.Some treaties allow a foreign country to tax U.S. employees even though they are spending less than six months working in the foreign country. For example, the U.S.-Philippines Treaty allows the Philippines to impose individual income tax on your employees if they spend a mere 90 days working for your U.S. organization in the Philippines.4 Under the U.S.-Indonesia Treaty, an individual employed by a U.S. organization may become subject to Indonesian income tax if he or she spends 120 days or more in Indonesia during a 12-month period.5
Note that, when you send U.S. resident employees to work overseas, you can generally avoid subjecting your U.S. organization to foreign tax by having them employed directly by a separate foreign entity. However, in that case the employee will most likely become subject to the foreign country's individual income tax.
There may be times, when your employees are working in another country, that the easiest way to provide them with foreign currency is to make compensation payments or advances through an organization established in that country. It may be possible to do this without subjecting the employees to tax in that country, but careful documentation is needed to ensure that they are not viewed as employees of the foreign country organization.
If your organization pays a U.S. resident as an independent contractor to work in a foreign country, the contractor may be required to pay income tax in the foreign country. Many treaties provide exemptions for U.S. individuals working in a foreign country temporarily as independent contractors, even if they are paid directly by a local country organization.6 These treaties often provide, however, that if the contractor has a base of operation in the foreign country, the contractor will be subject to that country's income tax. This could occur, for example, where you collaborate with a local country NGO and that organization provides an office for the contractor you have engaged.
Special Treatment of Teachers, Researchers, and Students
Many treaties provide special tax treatment for U.S. residents visiting a foreign country for certain purposes such as teaching in a school or university, or for conducting research in the public interest. These exemptions typically apply even if the individual is employed directly by an institution established in the foreign country. These treaties, which include the U.S. treaties with China and India, among others, typically provide an exemption from the foreign country's tax for up to two or three years.7 Many treaties also provide a limited tax exemption for U.S. residents visiting a foreign country as students or technical trainees.
Claiming Beneficial Treatment Under a Treaty
In order to claim the benefits of any treaty provision, it will be necessary to obtain and file the necessary forms. If your U.S. employees are relying on a treaty provision to avoid or reduce individual tax liability in a foreign country, you should consult an attorney in that country.
6.4 If Your Employees Are Taxed in a Foreign Country, Will They Still Be Taxed in the United States?
Living and working in a foreign country does not relieve a U.S. citizen or so-called resident alien from U.S. tax filing requirements. For these individuals, any income earned outside the United States is subject to U.S. individual income tax, even if the individual is employed by a foreign entity. If your organization employs U.S. citizens or resident aliens outside the United States, you will still be required to withhold federal income tax, unless your organization is also required to withhold income tax in the foreign country.8
There are, however, some mechanisms for individuals to eliminate or reduce U.S. taxes on income earned abroad, including the so-called foreign earned income exclusion, housing exclusion or deduction, the foreign tax credit, and deduction of foreign taxes. These are discussed further on.
On the other hand, a so-called nonresident alien is not subject to U.S. tax on income earned while working outside the United States, and is taxed on income earned while working in the United States only if he or she is present in the United States for a specified period of time. Nonresident aliens are also subject to U.S. tax on income connected to a business they regularly conduct in the United States, and certain other types of income, such as dividends, interest, and royalties, if they are treated as earned from U.S. sources.9
Has U.S. permanent resident status (green card holder). Is physically present in the United States for at least 183 days during a calendar year. Satisfies a substantial presence test and does not have a tax home in and closer connection to a foreign country.U.S. Foreign-Earned Income Exclusion
A U.S. citizen or resident alien who is working outside the United States, as an employee or independent contractor, may be able to exclude the income earned outside the United States from U.S. income tax, up to a fixed amount of income.10 To be eligible for this exclusion, an individual must be a U.S. citizen or resident alien, and in most cases the foreign assignment must be expected to last at least one year. Additional requirements apply. If your organization has employees or independent contractors who might benefit from this exclusion, they should be referred to a U.S.-based tax advisor to work through the specific requirements before heading out of the country.
If an individual employee or independent contractor does not meet the foreign residency requirement, he or she may still be able to deduct, as business expenses, some or all of the costs of travels, meals and lodging in a foreign country, assuming those expenses are not reimbursed by the organization. The individual must maintain receipts and records demonstrating that the expenses were reasonable and necessary to the performance of services as an employee or independent contractor of the organization.
Foreign Housing Exclusion or Deduction
If your organization pays for an employee's housing, the rental value of that housing is normally treated as taxable income to the employee, subject to limited exceptions. However, an employee who is working outside the U.S., and qualifies for the earned income exclusion described earlier, may be eligible to exclude a portion of an employer-provided housing allowance. Even if the employer does not provide housing or separately reimburse housing costs, an employee who incurs foreign housing costs, and otherwise qualifies, can exclude an additional portion of compensation from income that is otherwise subject to U.S. federal income tax. If the individual is an independent contractor, rather than an employee, he or she may be eligible to deduct a portion of the cost of foreign housing. Both the exclusion and deduction are limited in amount.11
U.S. Foreign Tax Credit or Deduction
An employee or independent contractor who has to pay income tax in a foreign country may be able to claim a foreign tax credit, which reduces the individual's U.S. federal (and possibly state) tax on the income earned abroad.12 Unlike a deduction or exclusion, which reduces taxable income, a tax credit reduces the tax itself. While the mechanics of the foreign tax credit can be rather complex, the underlying concept is simply that a U.S. citizen or resident alien should not be taxed more than once on the same income. In concept, each dollar of foreign income tax paid reduces an individual's U.S. federal income tax by one dollar, but various limitations can reduce the value of the credit. Foreign taxes that are not income taxes, such as value added taxes, do not generate U.S. foreign tax credits and therefore do not reduce U.S. taxes.
As an alternative to taking a foreign tax credit, an individual may deduct foreign taxes. This means reducing U.S. taxable income by the amount of foreign income taxes paid. A deduction, unlike a credit, does not directly reduce U.S. tax dollar for dollar. However, due to the complex mechanics of the foreign tax credit, it is sometimes more advantageous to claim a deduction rather than a credit. Individuals who pay foreign taxes should work with a tax advisor to determine how best to minimize U.S. tax liability.
Social Security Taxes
For U.S. employees working in a foreign country, the combination of U.S. Social Security and Medicare (FICA) taxes, and local country social taxes can be more burdensome than income taxes. These taxes, in turn, can become a significant burden for your U.S. organization when sending people to work overseas. Most foreign countries impose social taxes when individuals work within their borders for more than a short period. If your organization pays the local country social taxes for the employee, that payment may itself be taxed in the foreign country, compounding the tax bill for the employee and/or the organization.
Employees Working for a Foreign Branch
Individuals who work outside the United States for a branch office of a U.S. organization (rather than for a separate foreign legal entity), frequently have to pay both U.S. FICA taxes and foreign social taxes. The individual's income earned outside the United States will be included in the FICA wage base even if the income is eligible for the income tax exclusion discussed above. In addition, unlike income taxes, FICA tax cannot be reduced by a foreign tax credit. Note, also, that paying into a foreign country's social security system does not by any means guarantee that the employee will be eligible to receive any social benefits in that country.
The double social tax problem can be avoided for individuals who are working for a branch of a U.S. organization in any of the countries with which the United States has entered into so-called totalization agreements. As of the time of this book's publication, the U.S. has totalization agreements in effect with 24 countries.13 Most of these agreements provide that an individual who is working in a foreign country for five years or less pays only U.S. FICA taxes, and continues to accrue U.S. benefits, without having to pay social taxes in the foreign country. If the individual works in the foreign country for more than five years, he or she pays foreign social tax and ceases to pay U.S. FICA tax.14 Note that this has no effect on an individual's U.S. income tax liability.
Employees Working for a Foreign Legal Entity
If a U.S. individual is working for a foreign legal entity rather than a branch, there is a limited opportunity to avoid the double social tax problem. The foreign entity must have a certain relationship with a U.S. entity, and the U.S. entity must enter into an agreement with the U.S. Treasury Department.
Independent Contractors
U.S. citizens and resident aliens who work outside the United States as independent contractors also face the double social tax problem. Like employees, contractors often have to pay social taxes when working in a foreign country, while U.S. self-employment tax applies to income earned outside the United States. Totalization agreements, where in effect, can eliminate this problem for independent contractors as well as employees.
It is critical to consult with a legal advisor in the United States, and possibly in the foreign country, to understand the required procedures for taking advantage of any mechanisms for avoiding double social taxes.
6.5 Making Payments to People Working in Foreign Countries
Sending funds across international borders can be surprisingly difficult and expensive. If your organization has employees in a foreign country, you will probably need a local bank account. If you are paying independent contractors on a sporadic or short-term basis, it may be easier to wire funds from the organization's U.S. bank account directly to the individual's foreign account. In either case, wire transfers across borders can be costly, and at times frustrating. Not all U.S. banks have the ability to wire funds to all foreign locations.
In some countries, funding from outside the country is required to flow through designated bank accounts, or even government-owned bank accounts. For example, effective 2010, China mandated that most Chinese NGOs receiving foreign funding establish separate bank accounts to hold foreign funds, submit various documents, and report the purpose for all withdrawals of those funds.15
Beware of unwittingly facilitating tax evasion. If an employee or independent contractor requests that you make payments in an unusual way, this could be a sign that the individual is seeking to evade taxes. Such unusual requests might include being asked to make payments into a bank account in another country, or into an account owned by another individual or corporate entity. You should be wary of these types of requests.
6.6 Hiring Locally
If you plan to hire foreign country nationals to work in their own country, you need to explore whether this requires forming a separate legal entity. Even if not legally required, this may be a condition for your employees to be eligible for social benefits. If you hire people from within a foreign country, your organization may be required to withhold income and/or social taxes, and you will need to set up systems to do this.
If you are operating through a foreign branch, rather than a separate legal entity, you should determine whether your employees will be eligible for social benefits. This can be a critical factor, affecting your ability to recruit qualified employees.
Hire the Right People the First Time
Hiring employees who fit an organization's culture and values is always important, but it can be a greater challenge when hiring in a foreign country. Organizations that venture into a new country sometimes make the mistake of looking for the most experienced people, believing experience is needed to navigate territory unfamiliar to the organization. While experience can certainly be helpful, it can be a hindrance in places where unethical business practices are the norm. You may be better off hiring and training a young, less experienced person who conforms to your values.
Hiring the wrong person can be a costly mistake. In many countries, it's difficult to lay people off. Mandatory severance packages can be expensive, and legal disputes even more so. You will be better off for having taken the time to find the right people the first time.
Research Local Compensation and Benefits
Setting compensation levels in a foreign country, particularly in a developing country, can be challenging. The importance of doing your homework to determine market rates cannot be overstated. In many developing countries, a U.S. organization is viewed as a cash cow. If you negotiate without doing research you run the risk of paying far more than the market commands. In addition, keep in mind that if you are a small organization, you probably do not need to, nor should you, set compensation comparable to the levels of large global NGOs. Explore the local market and benchmark against organizations that are of a similar type and size to yours.
You may also be legally required to provide certain fringe benefits. Even if not legally required, some benefits may be expected as a matter of custom, and you may be at a considerable disadvantage in hiring and retaining employees if you do not provide these. For example, benefits that are customary in some countries may include transportation subsidies or lunch vouchers.
Finally, you should know whether you will be subject to legal requirements regarding vacations, leave, and even mandatory severance in the event that you need to reduce staff or close the foreign office entirely.
Always Have Written Employment Contracts
Too often, organizations hire employees in a foreign country only to be surprised by the rights their employees have. If you are hiring employees in a foreign country, the cost of hiring a local lawyer will be money well spent. It is generally advisable to work with a local attorney to draft detailed employment contracts that specify all of an employee's responsibilities, fringe benefits, and other rights including rights upon severance. Be sure to document the conditions under which you can lay people off, and understand what your liability will be and under what conditions.
Consider including a mediation clause in employment contracts if the applicable foreign law allows it. In many countries, particularly developing countries, a legal dispute can continue in the court system for years, and legal bills can be hefty.
6.7 Hiring or Sending Non-U.S. Citizens/Residents to Work in the United States
U.S. penalties for hiring illegal aliens are harsh! To establish that an employee is eligible to work in the United States, a U.S. employer is required to examine certain identity documents of an employee at the time of hire, and to record that on U.S. Citizen and Immigration Services (USCIS) Form I-9.
Your U.S.-based organization may wish to hire employees in a foreign country and have them work in the United States for a period of time to become familiar with the organization. Or, you may want to hire foreign individuals who have particular knowledge of and experience with the kinds of programs your organization conducts. Whatever the reason, if your organization wants to bring individuals who are not U.S. citizens or legal residents to work in the United States, either permanently or temporarily, you will need to consider visa requirements and U.S. tax consequences.
U.S. Visa Requirements
Employees of a foreign legal entity who are not U.S. citizens or permanent residents may need visas to work temporarily in the United States. Under the U.S. Visa Waiver Program, individuals who come from any of 26 participating countries are eligible to enter the United States without a visa if they plan to stay for no more than 90 days and meet additional requirements. Most individuals who are planning to enter the United States for business purposes, and don't meet the Visa Waiver Program requirements, must obtain a visa. There are many categories of temporary business visas, with varying requirements according to the type of visa. Authority to issue visas rests with the U.S. embassy or consulate in each foreign country.16
As a general rule, it is advisable to plan visits in advance and have foreign employees apply for U.S. business visas early.
U.S. Tax Considerations for Nonresident Aliens Working in the United States
Suppose your foreign affiliate sends a so-called nonresident alien (see section 6.4) employee to the United States to assist the U.S. organization for a period of time, or to undergo training by working in the U.S. operations. You will probably want to keep that employee on the foreign entity's payroll, at least for a period of time. If the U.S. entity becomes the employer, the individual will, in most cases, immediately become subject to U.S. federal income tax on the income earned in the United States.
The length of time a nonresident alien individual can spend working in the United States before having to pay U.S. tax depends on the status of the employer (U.S. or foreign organization), whether there is a tax treaty in effect between the United States and the individual's country of residence, and the specific provisions of any applicable treaty.
Who Is the Employer?
To determine whether non-U.S. employees are subject to U.S. federal income tax, you first need to ask: who is the employer? For this purpose, there are three possible types of employers:
It is always advisable to enter into written employment contracts. This protects the organization in a number of ways and also establishes which entity is the employer. It is possible, and common, for a single individual to be employed on a part-time basis by each of two related entities (for example, one U.S. and one foreign entity) under a so-called dual employment arrangement. See section 5.9.
Foreign Individuals Employed by a U.S. Entity
In most cases, a nonresident alien individual employed by a U.S. entity will be subject to U.S. federal income tax on all income earned while physically working in the United Sates and the U.S. employer will be required to withhold and remit the tax to the IRS.17 A limited exception applies where the individual is working for a foreign branch of a U.S. entity. A foreign individual is also generally required to pay U.S. FICA (Social Security and Medicare) taxes while working for a U.S. employer, even if only temporarily.
Foreign Individuals Employed by a Foreign Branch
If your foreign operations are conducted through a foreign branch office of a U.S. 501(c)(3) organization, rather than through a separate foreign legal entity, the branch office is treated for U.S. tax purposes as part of the 501(c)(3) organization. However, employees of the foreign branch are not subject to U.S. income taxes as long as they are not U.S. citizens or resident aliens and they are not physically working in the United States.
If a nonresident alien comes to work in the United States and is paid by a foreign branch of a U.S. entity, rather than being paid by the U.S. headquarters or office, the individual may be eligible for a limited exclusion of up to $3,000, if the individual is present in the United States for no more than 90 days during a given year.18
Treaty exemptions generally do not apply to a nonresident alien if the individual is working for a U.S. corporation as an employee, even if the individual is working for a foreign branch of a U.S. corporation.19 Some treaties, however, provide a special tax exemption for certain categories of individuals, such as teachers and researchers.
Foreign Individuals Employed by a Foreign Legal Entity
A nonresident alien who comes to work temporarily in the United States as an employee of a foreign legal entity is exempt from U.S. tax on the first $3,000 of income, if the individual is present in the United States for no more than 90 days during the year, as in the case of an employee working in the United States for a foreign branch described previously.
An employee of a foreign entity may also be eligible for a more generous exemption from U.S. federal income tax under an income tax treaty between the United States and the individual's country of residence. Many treaties allow a foreign individual to work in the United States for up to 183 days during a 12-month period without becoming subject to U.S. income tax.20 There are, however, a number of treaties that shorten this period.21
Independent Contractors
If your U.S. organization hires nonresident alien independent contractors to work temporarily in the United States, unless a treaty applies they will generally become subject to U.S. tax, and your organization will be required to withhold taxes. Like employees, non-U.S. independent contractors are eligible for a limited income tax exemption of up to $ 3,000, but only if they are under contract with a foreign entity or a foreign branch of a U.S. entity. If there is a treaty in effect between the United States and the contractor's country of residence, a more generous exemption may apply. Many treaties will allow a contractor to work in the United States for up to 183 days before becoming subject to U.S. tax, although some provide for shorter periods.22
While the distinction between employees and independent contractors is beyond the scope of this book, it is critical to seek legal advice before you decide to treat an individual as an independent contractor rather than an employee for tax purposes.
6.8 Special Considerations for Volunteers
Volunteers Traveling: The Cultural Safari
Many organizations provide opportunities for volunteers and/or donors to experience the organization's mission first-hand, by visiting foreign programs and even volunteering their services. This can be a great way of developing strong supporters who will spread the word about the great things your organization is doing. Often, volunteers combine service and vacation into one trip. In fact, some organizations will even help arrange some sightseeing. All of this helps to deepen appreciation for the organization, its mission, and the culture within which your organization works.
Volunteers often want to know whether they can take a federal income tax deduction for their travel expenses, including airfare and in-country lodging and meals. A volunteer can deduct out-of-pocket costs, but not the value of his or her time, as long as the volunteer is performing a service for the organization in a genuine and substantial sense. While the tax law says that there must be no significant element of personal pleasure, recreation, or vacation, the mere fact that these selfless individuals derive pleasure from helping others does not disqualify them from taking a tax deduction.23
Of course, individuals can only deduct expenses that they actually incur, so if your organization funds or reimburses any expenses, they are not deductible by the individual. On the other hand, a volunteer who pays his or her own expenses indirectly, by reimbursing the organization for travel expenses it pays on the volunteer's behalf, may still deduct the travel expenses. Beware, however, of the individual who offers to make an earmarked contribution to your organization to fund another individual's travel. That may be an indirect gift to an individual, rather than a charitable contribution.
It is best to avoid giving any tax advice to your volunteers. Instead, you should tell them to consult their own tax advisors to determine which expenses they can deduct. You will, however, have to make a judgment about whether an individual provided services that benefited your organization. Volunteers who wish to deduct expenses of $250 or more must obtain a written acknowledgment from the organization setting forth the nature of the service that the volunteer provided, among other information.24
Most organizations do not fund the cost of foreign travel for volunteers, including board members and donors. There is good reason for this. If an organization uses its funds to pay for expenses that end up being personal in nature, that could trigger tax penalties for the organization. In the extreme case, this type of payment could even result in loss of tax-exempt status. In many cases it will be difficult to monitor whether an individual traveler is engaging in significant personal recreation or vacation while on a trip, so your organization is generally better off staying away from funding these kinds of expenses.
Of course, there are occasions where organizations recruit volunteers for foreign projects and agree to reimburse some or all expenses. This can be entirely appropriate when the individual is clearly traveling to perform a service that benefits the organization.
If your organization chooses to fund the cost of some travel for donors and volunteers, you should have a written policy that sets forth which expenses will be funded, and under what conditions. In addition, it is always advisable to enter into written agreements with volunteers that travel overseas, setting forth the respective responsibilities of the volunteer and the organization, as well as which expenses will be reimbursed. Consider also including a clause releasing the organization from liability in the event of sickness or harm.
Sending Volunteers for Extended Periods
Some organizations recruit volunteers to assist with programs in a meaningful way, staying for extended periods of one year or longer. Sending volunteers for extended periods can raise immigration and visa issues similar to those applicable to employees. Some countries, including the Philippines and South Africa, have adopted legislation in recent years to make it easier for foreign volunteers to obtain visas.25 It is important to understand the requirements of the particular country to which you wish to send volunteers. In addition, if volunteers are spending extended periods in a foreign country, you may want to investigate the visa requirements and restrictions applicable to their dependents.
Volunteers will also be concerned about whether they might be subject to civil liability in a foreign country in connection with their volunteer services. In the United States, legislation has been adopted at the federal and state levels to encourage volunteerism by removing legal pitfalls that discourage individuals from serving as volunteers. For example, the Volunteer Protection Act of 1997 encourages volunteers to work for nonprofit organizations, by sheltering them from individual civil liability for harm caused by their own negligence, as long as they do not intentionally cause harm or act with gross disregard for the risk of harm.26 This U.S. law does not, however, protect volunteers from liability under foreign country laws, and many countries do not have laws that protect volunteers in this way.
Safety and security can also be an issue for volunteers. What happens if a volunteer is injured while in service? Many countries do not afford workplace protections to volunteers. At the least, your organization needs to advise volunteers of the need to be responsible for their own medical needs while working in a foreign country, and protect the organization by having volunteers sign well-crafted waivers of liability.
Tapping into Foreign Volunteers
In the U.S., we take for granted that individuals can freely volunteer in a multitude of ways in furtherance of humanitarian, social, political, and a host of other causes. Volunteers also enjoy certain protections, discussed above. In many countries, the legal environment creates obstacles to volunteering. In the extreme, it may be illegal to engage volunteers, even for the benefit of a nonprofit organization. This is the case in the former Soviet States.27
Even if you are allowed to engage volunteers, in many countries the laws do not distinguish between volunteers and employees. The effect of this may be that your organization is required to pay into social programs for volunteers. In some countries, if you reimburse expenses of a volunteer you may become subject to a host of labor laws, and volunteers may be required to pay income tax on reimbursed expenses.
In addition, volunteers may be reluctant to serve for fear of legal liability. Few countries have enacted laws similar to the U.S. Volunteer Protection Act, previously described, to protect volunteers from liability.
The important point here is that it is not always easy, or even possible, to engage volunteers in a foreign country. While local volunteers may be a great asset to your organization, you will need legal advice in the relevant country to find out whether and how you can engage volunteers without undue costs, and risks, to your organization and your volunteers.
6.9 Review and Further Considerations
Chapters 4, 5, and 6 have addressed important legal and practical considerations for organizations that want to move beyond grantmaking so that they can conduct programs in one or more countries outside the United States. In these chapters, we have explored a variety of ways your organization can structure its foreign activities, and we've looked at factors that come into play in determining the optimal structure.
In Chapter 7, we turn to another kind of foreign activity, fundraising. Charitable organizations, particularly those that conduct programs in developing countries, can sometimes identify potential supporters in multiple countries. These organizations typically want to know whether and how prospective donors, outside the United States, can obtain tax deductions (or other tax benefits) in their own countries. While this is often possible, it requires careful structuring. This is the subject of Chapter 7.
Notes
1. See “NGO Laws in Sub-Saharan Africa,” Global Trends in NGO Law 3, no. 3 (June 2011), 10, available at www.icnl.org/research/trends/trends3-3.html.
2. Appendix C lists the U.S. income tax treaties in force as of the time of this book's publication. An updated list, and the text of each treaty, can be found on the United States Treasury Department website at www.treasury.gov/resource-center/tax-policy/treaties/Pages/default.aspx. See also IRS Publication 901, U.S. Tax Treaties (April 2011), available at www.irs.gov/publications/p901/index.html.
3. See, e.g., United States Model Income Tax Convention of November 15, 2006 (“U.S. Model Income Tax Treaty”), Article 14, available at www.irs.gov/Businesses/International-Businesses/United-States-Model---Tax-Treaty-Documents. Article 14 provides treaty benefits to individuals employed by a U.S. corporation that has a permanent establishment in the foreign country, as long as the compensation is not borne by the foreign office.
4. Convention Between The Government of The United States of America and The Government of The Republic of The Philippines with Respect to Taxes on Income (“U.S.-Philippines Income Tax Treaty”) (1976), Article 16, available at www.irs.gov/Businesses/International-Businesses/Philippines---Tax-Treaty-Documents.
5. Convention Between The Government of The United States of America and The Government of The Republic of Indonesia for the Avoidance of Double Taxation (“U.S.-Indonesia Income Tax Treaty”) (1988), Article 16, available at www.irs.gov/Businesses/International-Businesses/Indonesia---Tax-Treaty-Documents.
6. In some treaties, this falls under an exemption for so-called independent personal services, while in others it falls under an exemption for business profits that are not connected with a permanent establishment in the particular country.
7. Convention Between The Government of The United States of America and The Government of The People's Republic of China for the Avoidance of Double Taxation (1984) (“U.S.-China Income Tax Treaty”), Article 19, available at www.irs.gov/Businesses/International-Businesses/China---Tax-Treaty-Documents.; Convention Between The Government of The United States of America and The Government of The Republic of India for the Avoidance of Double Taxation (1989) (“U.S.-India Income Tax Treaty”), Article 22, available at www.irs.gov/Businesses/International-Businesses/India---Tax-Treaty-Documents.
8. I.R.C. § 3401(a)(8). In addition, withholding is not required if the employer reasonably believes that the income will be eligible for the foreign earned income exclusion, discussed in section 6.4.
9. I.R.C. § 871. For more information about the U.S. taxation of nonresident aliens, see IRS Publication 519, U.S. Tax Guide for Aliens (February 2012), available at www.irs.gov/publications/p519/index.html.
10. I.R.C. § 911. See also IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (December 2011), available at www.irs.gov/publications/p54/index.html. The foreign earned income exclusion does not apply when an individual is working in a U.S. Territory or Possession. This means it does not apply to individuals working in Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands. Separate exclusions, with their own requirements, apply to individuals working in any of these U.S. Territories or Possessions.
11. I.R.C. § 911. The housing exclusion reduces total income on an individual's U.S. federal tax return, while the deduction is taken into account in computing adjusted gross income. The housing exclusion and deduction, along with the earned income exclusion, are computed and reported using IRS Form 2555.
12. I.R.C. § 901. For detailed information about the individual foreign tax credit, see IRS Publication 514, Foreign Tax Credit for Individuals (April 2012), available at www.irs.gov/publications/p514/index.html.
13. Totalization agreements are in effect, as of the time of this book's publication, with: Italy, Germany, Switzerland, Belgium, Norway, Canada, the UK, Sweden, Spain, France, Portugal, The Netherlands, Austria, Finland, Ireland, Luxembourg, Greece, South Korea, Chile, Australia, Japan, Denmark, Czech Republic, and Poland.
14. Detailed information about Social Security taxes for individuals working outside the United States and the effect of specific country totalization agreements can be found on the U.S. Social Security Administration website at www.socialsecurity.gov/international.
15. Circular of the State Administration of Foreign Exchange (SAFE) on Relevant Issues Concerning the Administration of Donations in Foreign Exchange by Domestic Institutions, issued December 30, 2009. An English language version is available at www.safe.gov.cn/model_safe_en/news_en/new_detail_en.jsp?ID=30100000000000000,221&type=&id=2. A summary is available at hrichina.org/content/403.
16. Detailed information about the types of visas and requirements for obtaining a visa, is available on the U.S. Department of State website at http://travel.state.gov/visa.
17. I.R.C. §§ 871, 861(a)(3).
18. Id.
19. See, for example, U.S. Model Income Tax Treaty, supra note 3, Article 14.
20. Id.
21. See, e.g., U.S.-Indonesia Income Tax Treaty, supra note 5, Article 16, which allows the United States to tax a nonresident alien once that individual has been working in the United States for a foreign employer for at least 120 days during a 12-month period. Treaty provisions are reciprocal so, for example, under the U.S.-Indonesia Treaty, a non-U.S. resident becomes subject to tax after spending 120 days working in the United States, just as a U.S. citizen or resident becomes subject to Indonesian tax once he or she has spent 120 days working in Indonesia.
22. For example, the U.S.-India Income Tax Treaty, supra note 7, provides for a 90-day period of exemption.
23. I.R.C. § 170(j).
24. See IRS Publication 526, Charitable Contributions (February 2012), 4, available at www.irs.gov/publications/p526/index.html.
25. See United Nations Volunteers Programme, “Drafting and Implementing Volunteerism Laws and Policies: A Guidance Note” (2011), available at www.icnl.org/research/resources/volunteerism/index.html.
26. 42 U.S.C. § 14503.
27. See United Nations Volunteers Programme, “Drafting and Implementing Volunteerism Laws and Policies: A Guidance Note,” supra note 25, at 11.