The View

Look closer, and you’ll see charitable foundations are often not about giving

Examine the tax structure behind charitable foundations, and in some cases it turns out that the benefactor is the one to actually benefit

PUBLISHED : Thursday, 14 December, 2017, 8:01am
UPDATED : Thursday, 14 December, 2017, 10:28pm

The central question that private bankers ask their clients is: “What does your money mean to you?” It’s a fundamental moral issue at all levels of wealth. Revealing answers range from the odious (controlling the lives of your family members) to the visionary (saving the world).

Eventually, bankers say, new wealth enjoys the luxury lifestyle for about five years before they start looking for some purpose in their lives.

New and old Asian wealth have confused and conflated the meaning of charity versus philanthropy, and the need to accomplish more with their vast assets. The best analogy is that charity is when you hand money to the Salvation Army in the street, who then decides how to distribute it. Philanthropy is when you stand in the street and decide by yourself who to hand money to.

Living with the obligations and responsibilities of wealth isn’t easy. Big money creates its own gravity, forcing their owners’ lives into an orbit. Gift giving as a form of charity is certainly commendable and flexible, allowing donors to shift the management of charity to established organisations.

But this concept is becoming inadequate, even corrupted, considering the super wealth being created by technology success. And charities are also becoming a source of potential abuse.

Being a philanthropist is an abused cliché in Hong Kong, used in the society pages of glamour magazines and tabloids to glorify random gift giving.

Philanthropy requires that the donors develop an abiding vision of what kind of problems they seek to solve; plus the need to establish an infrastructure to continue the work for the long term, and hire a team to find solutions. It’s a laborious and long term mission, like Bill and Melinda Gates Foundation’s commitment to cure malaria, among other poverty alleviation efforts.

Perhaps it’s the reluctance of the wealthy to part with a significant amount of money for a passionate mission that prompted the Bill Gates’ and Warren Buffett “Giving Pledge,” where 171 billionaires have promised to give away at least half of their net assets.

That would almost be heresy for many Asian families who are dedicated to the deluded quest to build dynasties. Or, as one US billionaire joked to me: “I just entered the Forbes 400 list of the wealthiest, and want to savour the moment before I give it all away.”

Charles Chen Yidan, co-founder of Tencent Holdings and founder of Chen Yidan Charity Foundation, which sponsors the Yidan Prize in education, realised he needed to leave the tech company and its own Tencent Foundation to devote all of his time to philanthropy to fulfil his personal objectives.

“There were issues and problems in global education that I wanted to address.,” he said. “This concern and desire to do more led me to establish my own foundation. If you want to do something well you must have your own system.”

But he represents an exception, because there is plenty of exploitation of the charity system’s tax privileges by tech money and some mainland enterprises.

HNA Group, the Chinese conglomerate, established a US non-profit charity that disclosed that it and an affiliate in China hold 52 per cent of the organisation. Exactly who controls the company and the value of the asset transfers has made banks cautious in its dealings.

Here’s a twist on the spirit of giving. In his recent Facebook post, Mark Zuckerberg said he intended to divest between 35 million and 75 million Facebook shares in the next 18 months to fund his charity. He currently holds 53 per cent of the voting stock. If he sold 35 million shares, his voting stake would be reduced to 50.6 per cent.

But, according to the Financial Times, if he sold 75 million shares, he would be dependent on the votes of co-founder Dustin Muskovitz to exercise control over a majority of votes. So Zuckerberg’s advisers cooked up a stock reclassification that effectively created a third non-voting class, that would have solved this problem. Objections and the threat of a lawsuit from investors stopped his plan.

Once the US$12 billion of proceeds from the stock sale is transferred to his foundation, all investment income is tax free. He only needs to donate 5 per cent of principal per year to charity. Most foundations and family investment offices of that magnitude can make investment returns more than 5 per cent per annum. So the principal in the foundation never, ever actually need to be disbursed for charity.

For many foundations, the present value of the tax subsidy to the tycoon personally far exceeds the net disbursement of the principal from the foundation on charity.

New technology wealth seems fixated on funding scalable charity projects with the same model as their companies. Or that which benefit their companies.

Unfortunately, many poverty alleviation projects can’t be scaled, such as finding clean water for poor villages in Africa. It would be more practical and noble if Zuckerberg would simply give away the US$12 billion, rather than playing games with tax planning.

This is important because vast sums of wealth need to be recycled back into the economy rather than being hoarded by families. Arab oil money from the 70s, Japanese industry in the 80s, were eventually redeployed through the global economy.

After all, how much money can you spend on your family?

Peter Guy is a financial writer and a former international banker