The tax impact of the philanthropic activities of family offices and private enterprises was recently the topic of a discussion by Mike Linter, global head of private enterprise tax, global tax and legal at KPMG International, and his colleague Greg Limb, global head of family office and private client. Linter kindly allowed us to share it with Crain Currency readers.
From a tax perspective, how can private enterprises look to enhance tax-efficient giving?
Mike Linter: The first step is choosing the right structure. The framework for effective giving will naturally vary from country to country and person to person, but the important common thread is that a strategic framework is necessary to provide direction to activity, to provide the basis for measuring impact, to enable meaningful collaboration and to provide a sustainable forum.
Choosing the right structure for activity is dependent on many different factors, including local regulations, tax regimes, cultural norms and historical activity, as well as whether it is pursued personally or via a business. The ultimate purpose for giving will likely factor in that decision-making. Family and corporate foundations are the most commonly adopted structures, and for good reason. They can help provide clarity on where to direct funds and how to respond to requests for funding. More important, they provide the vehicle to engage and collaborate with other foundations, philanthropists, governments and NGOs.
Direct giving continues, however, to remain popular and effective, allowing philanthropists and their families to support more personal projects, often in communities and causes near to them.
On that note, many businesses decide to keep the family philanthropy separate from the company policy on philanthropy, so that the one does not succumb to the constraints of the other, even if they have similar values and motivations. In this way, neither the reputation of the family nor of the business is at stake, should either of them be subjected to criticism.
Greg Limb: I’d like to add that there is no “one size fits all” in terms of choosing the right structure for philanthropic activity. So rather than jump to an approach, it is important to understand the “why” to help get to the best “how.”
Successful entrepreneurs often want to give back in terms of money, time and expertise. They also want to be able to demonstrate the impact of their activities. To illustrate this, let’s say a client wished to help startup businesses struggling to obtain financing following a similar experience at the beginning of their career. Initially, credit facilities were provided on an ad hoc basis but without a strategy or clear plan of what they wanted to achieve. It proved difficult to measure the impact, which took away some of the passion. This is where some formality in terms of the criteria for helping startups, the services to provide and what is expected in return are key in helping to ensure that the philanthropist creates maximum impact. In this instance, a not-for-profit company was suggested to provide some separation from him personally, too.
Corporate experience also plays a role in choosing the right structure. Philanthropists with their roots in private equity, for example, adopt structures where they can bring about the most effective change and that enable levers to be pulled to ripple change over a much wider area, whereas those from a venture capital background choose structures that allow them to stay close to projects in which they invest and see firsthand how the money is used.
What emerging trends are you seeing in the space today?
Greg Limb: Two main trends have emerged in recent years — the trend to measure and demonstrate impact and the trend of impact investing.
First, one of the most significant changes to emerge from today’s philanthropists is the recognition of the need to measure and demonstrate impact. While today’s philanthropists may be driven by the same desires as their forebears — wanting to give back to society — they differ in the confidence of their ambition, their international reach, the structures adopted and the discipline of measuring impact. The influence of commercial enterprise and the greater discipline adopted by philanthropists are changing the way activity is measured and evaluated. It is not, however, a perfected art, with philanthropists only now beginning to explore the role that increased amounts of data available to them can play. Measuring the return on investment and the return on effort will continue to evolve and change as philanthropists have ever-greater access to data from the projects and causes they support.
Another significant change in today’s philanthropists is the emergence of impact investing and intentional giving. Technology has not only enabled a new channel for donations but also a platform to expose systemic inequities, raise public awareness about the need for change and highlight global leading practices. With this awareness, private enterprises are becoming more intentional about their philanthropy. For instance, many private enterprises are serious about integrating environmental, social and governance (ESG) factors into their operations, whether it’s addressing climate impacts of the business, making donations to the community, enhancing health and safety or ensuring board diversity.
While impact investing is still in its infancy, there is a shared belief among philanthropists that their proportionate allocation will increase substantially over the short term. At the same time, we are witnessing large global capital allocations toward ESG investment strategies. All this capital is seeking impact — the core business of philanthropic organizations. Philanthropists will, naturally, have different goals and aims, but there is a clear trend toward impact investment where track record and measurable societal impact are aligned.