SUB-SAHARAN AFRICA
Special Feature for the June Issue of IJNL: Income Tax Issues
for NGOs in Anglophone Africa
And
it's accompanying charts: Tax Exempt Activities
Tax Exempt Income Types
Tax Benefits for Donations
Income Tax Issues for NGOs in Anglophone Africa
by
The International Center for Not-for-Profit Law (ICNL)
Introduction. This paper
discusses the current state of income[1] tax benefits for NGOs in Anglophone Africa[1]
and compares the laws permitting these benefits to international good
practice in this area. It is based on
research conducted in July 1998 and January 1999 at the International Bureau of
Fiscal Documentation in the Netherlands, which has the largest collection of
tax legislation in the world. Some of
the legislation may have changed in recent months, and if that is the case, the
paper may not be entirely up-to-date.
The countries surveyed are: Botswana, Cameroon, Egypt, Eritrea,
Ethiopia, The Gambia, Ghana, Kenya, Lesotho, Liberia, Malawi, Mauritius,
Namibia, Nigeria, Seychelles, Sierra Leone, Somalia, South Africa, Sudan,
Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe.
The paper
and its accompanying charts consider three issues: the range of not-for-profit
activities that are exempt from tax, the types of income that are exempt from
tax, and the tax benefits granted for donations to charitable and other
organizations. It is clear from our
research that the approaches to these issues are remarkably similar throughout
Anglophone Africa. The similarity is decreasing, however, as more and more
countries are looking to increase the tax advantages for NGOs and their donors,
modernizing their treatment of these issues and bringing their national
legislation closer to the standards of international good practice discussed in
ICNL’s paper Tax Preferences for
Nongovernmental Organizations.[3]
Tax
preferences for NGOs and their donors are generally thought to be necessary to
promote an enabling environment for these organizations. Because NGOs are seen
as providing significant public benefits, most countries in the world tend to
provide some form of tax incentives so as to encourage their activities. Tax
incentives are generally deemed appropriate for NGOs because:
1)
they tend to be efficient and cost-effective providers of
social services;
2)
they promote important civic values;
3)
they support charity and philanthropy;
4)
they encourage democracy and pluralism; and
5)
they can contribute to economic development in important
ways.[4]
Tax exempt activities. In almost all
countries in the region the laws permit organizations that engage in certain
types of activities to be exempt from income taxes.[5] This is
generally permitted either in the law itself or in an accompanying schedule,[6]
although Sudan allows exemption only by ministerial order. As the attached chart on “Tax Exempt
Activities” suggests, virtually every country in the region exempts educational,
charitable,[7]
and religious activities, with quite a few also exempting amateur sports
activities. In general the laws of the
various countries provide that such activities must be for public benefit or
“of a public character,” which may limit the exemption to activities that are
performed in the public interest and not for mutual benefit. This is not completely in accord with
international practice, which tends to also permit income tax exemption for the
income of clubs and societies, at least to the extent that the income comes
from membership dues and not from business activities.[8]
In addition
to the three or four widely accepted types of activities for which an income
tax exemption is available, some countries also specifically permit exemption
for other kinds of public benefit activities. These include activities related
to health (Egypt); social welfare and civic improvement (Malawi); science
(Nigeria); and welfare and culture (Somalia).
In an important development, however, the Katz Commission in South
Africa has recommended changing the current legislation, which restricts the
tax exemption to religious, charitable, and educational activities, to more
broadly extend tax exemption to a list of 15 different categories of
organizations. These include organizations whose activities are focused on
culture and the arts and environmental concerns, as well as institutions for
the advancement of science, among others.[9]
The
proposed change in South Africa would be in accord with the wider range of exempt
activities permitted in other countries.
For example, Germany permits a large number of activities to be exempt
from tax under section 52 of the Tax Code (“Abgabenordnung”); the U.S. has
twenty-three categories of tax exempt organizations;[10] Sweden also
has a long list,[11]
as does Hungary, but the latter strangely enough does not include education in
the list of exempt activities.[12]
The general trend in Anglophone
Africa to date seems to be more conservative than the approach being taken by
the Katz Commission. But having a longer listing of exempt activities, which
includes such things as science, culture, job and skills training,
international understanding, and the environment, would seem to be
appropriate. This is especially true in
light of a more modern trend recognizing the public benefit of such activities
– while they may not have been recognized when the concept of charity first
entered English law in 1601, they are certainly seen today as being of benefit
to the public.
Tax exempt income by type. The tax laws of Anglophone Africa
generally exempt the income of tax exempt organizations that comes from gifts,
grants, and donations, as well as membership dues (in most cases). However, the
rules for income from investments (dividends, interest, and rent) vary. In addition, the rules that apply to income
from business activities also differ from country to country.
Investment income is, under the usual
rule[13] in these countries, not subject to
tax. But some laws are either silent on
the issue (Nigeria) or tend to follow the rule in Francophone Africa,[14]
which taxes income from movable property without exemption for NGOs (Egypt).
One interesting limitation is found in Liberia, which only exempts interest if
it is earned on property used for exempt purposes, but the general trend is to
exempt all income from investment. This is in accord with international good
practice.
Business income is generally subject to
tax in these countries. Although some countries solve the problem by simply
denying tax exempt organizations the privilege of engaging in trade or business
activities,[15] most
allow them to engage in business but tax the income derived therefrom. The countries that do tax income from
business activities make a distinction between related and unrelated
activities. Thus, an NGO that operates a school would be permitted to charge
tuition in the normal course of events, but it could not engage in any trading
activities, such as selling groceries or computers, without being subject to
tax on the income generated by the latter activities. Other countries use what
is known as the “destination of income test,” under which the income from
business activities is not taxed if it is dedicated to the exempt activities of
the organization. Countries following this rule include Liberia and Mauritius.
From the study of international good practice, it is clear that either rule
meets international standards.[16]
The more lenient destination of
income test may be appropriate for developing countries with a weak NGO sector,[17] but it does not
generally apply in this region.[18]
Tax benefits for donations. Although
there are several ways in which the tax law may provide benefits for donors to
NGOs,[19] the pattern in Anglophone Africa
is to permit a deduction for such gifts.
This is a widely but not universally accepted practice in the
region. The accompanying chart indicates
that of the 24 countries surveyed, 13 permit tax deductions for gifts to charity
and other public benefit organizations.
But more tellingly, the more recent legislation generally tends to
permit deductions, while the older legislation tends not to.
There are
essentially three issues that need to be considered with respect to tax
benefits for donations:
·
Is a deduction allowed?
·
What are the percentage limitations if a deduction is
allowed (and are they different for individuals and businesses)?
·
What types of organizations or activities qualify as
charitable donees?
With respect to the question of
whether a deduction is permitted at
all, the approach taken in the older legislation is that deductions are allowed
to corporations only for business expenditures, which clearly would not include
a gift to charity. The law in Zimbabwe exemplifies this approach. But
legislation adopted since the mid to late 1960’s tends to allow at least a
modest deduction for charitable gifts, either those made by individuals, by
corporations or by both. In nine of the thirteen countries where deductions are
permitted, the laws allowing them have been adopted since that time.
With respect to percentage limitations, the most
recently adopted tax legislation relating to NGOs was adopted in Uganda, and
that permits a deduction of up to 5% of income for charitable gifts for both
businesses and individuals. And the
percentage limitations of other recent legislation are even more generous
(Zambia – 15% for both business and individual donations; Botswana – 20% for
individual donations). In addition, the
pending proposal of the Katz Commission in South Africa bears out the
prevailing new approach – the recommendation is that the present restrictive
rule (which allows for the deductibility of donations only up to 2% of income)
be repealed in favor of more significant benefits, although the exact
percentage limit is not specified.
With
respect to activities of
organizations that are qualified to receive deductible donations, it is less
clear that the modern trend favors a fairly large class of permissible donees.
The general rule in the region is to have only a limited group of activities,
such as educational, religious, and charitable activities, qualify. In fact, in
South Africa and Namibia at present, deductible gifts may only be made to
educational organizations. But the Katz
Commission favors increasing the range of organizations that qualify.[20] Consistent
with that report, it would not be surprising to see the list of 15 exempt
activities carried over into this area as well.
Developing
a broader range of public benefit activities to which donors may make tax
deductible gifts is consistent with a general desire to encourage more private
participation in both social welfare activities and in social and economic
development. In general deductions
stimulate charitable giving, and some studies in the United States indicate
that the gain to the supported institutions at least equals and in some cases
exceeds the revenue loss to the fisc.[21] Nonetheless, it is important that sufficient
resources be devoted to ensuring that the allowance of deductions for
charitable contributions does not become subject to fraud and abuse. Therefore
rules must be developed that will assist the revenue authorities to ensure that
a gift is actually being made to charity when a deduction is permitted.[22]
Conclusion. At present the tax laws in Anglophone Africa provide some tax
benefits for NGOs and their donors. In
some countries in the region these benefits are still too limited to create an
enabling fiscal environment that will strengthen the ability of the NGO sector
to provide needed social services. This is true because the range of tax exempt
activities is too narrow and because there are no tax benefits for
donations. Our research indicates,
however, that more and more countries are recognizing that the failure to
provide adequate tax benefits will stifle development. Thus, the trend in the region is to create
more tax incentives than were traditionally available, and this trend is entirely
consistent with international good practice.
[1] A similar study of VAT and excise tax issues is also underway.
[2] This paper addresses only Anglophone Africa because the systems of taxation in Francophone and Lusophone Africa are in some important ways dissimilar from those in the Anglophone countries. ICNL is studying the legislation in the Francophone and Lusophone countries and will prepare a second paper with a similar discussion of the relevant issues in that context.
[3] See ICNL, Tax Preferences for Nongovernmental Organizations, ICNL web site, www.icnl.org (1999) (hereinafter “Tax Preferences”).
[4] For further discussion of some of these attributes of NGOs, see Handbook on Good Practices for Laws Relating to Nongovernmental Organizations (Discussion Draft published by the World Bank, 1997).
[5] Ethiopia and Eritrea have no specific rules for exemption. It can, however, be inferred from the fact that the income and profits tax is imposed only on trade and business activities that at least some organizations are exempt.
[6] Some countries rely heavily on a schedular system, while others do not. Using schedules seems to be less attractive to the drafters of more recent legislation, such as that enacted in Uganda in 1997.
[7] Some countries use slightly different terms, such as “benevolent,” “relief of poverty and distress,” etc. It is clear, however, that these terms are intended to encompass organizations that are within the normal definition of “charity” in the English-speaking world.
[8] See Tax Preferences, supra note 3, at 3.
[9] For a full listing of the proposed categories, see the attached chart on “Tax Exempt Activities,” which is taken from the Ninth Interim Report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa – Fiscal Issues Affecting Non-Profit Organizations, 1999 (the Katz Commission report). This report may be found on the web site of the Ministry of Finance in South Africa, www.finance.gov.za. It is the ninth report of the Katz Commission.
[10] Internal Revenue Code section 501.
[11] See report on Sweden, in Salamon (ed.), International Guide to Nonprofit Law (John Wiley and Sons, 1997).
[12] See report on Hungary in ICNL, EFC, and UBFA, Select Legislative Texts and Commentaries (ICNL, 1995, second edition appearing as International Reporter on Not-for-Profit Law, 1999). The rationale for this seems to be that education is seen as a function of the state, but that seems a bit too restrictive now because there are many private schools in Hungary.
[13] The exceptions to this are Ethiopia, Eritrea, and Sudan, which have no clear rules about exemption.
[14] This is, however, not the rule in France. In a set of very complex special rules, most NGOs are exempt from tax on most sources of investment income.
[15] Both South Africa and Namibia tend not to permit NGOs to engage in business activities. This is like the rule in the UK, which does not permit charities themselves to engage in business, but does permit business activities to be conducted indirectly, through a subsidiary. See Philip Kirkpatrick, Country Report for the Laws of England and Wales Affecting NGOs, 15 (ICNL, 1996).
[16] See Tax Preferences, supra note 3, at 5.
[17] See Tax Preferences, supra note 3, at 6.
[18] Interestingly the destination of income test is also
used in developed countries with strong NGO sectors. The United States followed
that rule until 1950, and the UK essentially has such a system today because it
permits 100% of the profits of a trading subsidiary to be covenanted to a
charity and thus escape tax.
[19] See Tax Preferences, supra note 3, at 9.
[20] See Katz Commission, supra note 9, at 5.14.6.
[21] See Auten, Cilke & Randolph, The Effects of Tax Reform on Charitable Contributions, XLV National Tax Journal 266 (1992). The fact that this is so can be easily demonstrated – if a person pays taxes on $100 at a thirty percent tax rate, the fisc only receives $30, which it can use for public purposes. If the person contributes the $100 to charity and is able to deduct that amount, the person saves $30 in tax but the full $100 is devoted to public purposes. Thus, the government’s “subsidy” to the charity is equal to the amount of the unpaid tax ($30) and is increased by the amount of the private person’s donation for public purposes net of the unpaid tax ($70).
[22] One possibility would be to require that the recipient organization give the donor a receipt stating that it qualifies as a proper recipient under the law, that the gift will be used for public benefit purposes, and stating the amount of a cash gift or the fair market value of a property gift.
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