The International Journal of Not-for-Profit
Law - Volume 2, Issue 1
A quarterly publication from The
International Center for Not-for-Profit Law
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TAX
AND OTHER BENEFITS FOR PUBLIC BENEFIT ORGANISATIONS (PBOs) Paul
Bater (International Bureau of Fiscal Documentation, Amsterdam, Netherlands) A. Non-tax Benefits
§
Decided by: (a) central government (b)
local government independently of central government (c)
local government within limits determined by central government
§
Decided by donor by reference to donor's own criteria (which
may be restricted by domestic or foreign laws).
§
Central or local government decides who can raise funds in
this way §
Public decides which NGOs they wish to support
§
Volunteers decide which NGOs they will help without payment Many states use a wider definition of PBOs for the purposes
of granting non‑tax benefits than they use for the purposes of granting
tax benefits. Examples of this include: §
appeals for the victims of a natural disaster may raise funds
for the private benefit of some individuals who are not poor; § campaigning NGOs (such as Greenpeace) may be regarded as too political to receive tax benefits but may still be eligible to receive other benefits. B. Differences between
tax laws and other laws regulating NGOs 1.
Countries with more than one legal jurisdiction usually have one national
tax system for all jurisdictions. 2.
Many countries impose taxes at both national and local levels, with
different laws and benefits at each level 3.
One country can have different criteria for granting tax privileges which
vary according to each tax that it imposes. 4. Tax laws are increasingly influenced by international trends. For example, mobile funds can move from a state with higher taxes to a state with lower taxes, so some states are starting to rely more on taxes on immobile factors of production such as labor, real property and energy use. C. Tax benefits and
related issues 1.
NGOs typically have 3 main sources of funds: §
grants and subsidies from central and local government; §
private gifts (in cash or in kind) from individuals and
companies; and §
self-generated income (mainly income from the sale of goods
or services; some NGOs with large funds also have income from investments). 2.
Direct taxes on income §
Most states do not tax grants and subsidies.
This is achieved either by excluding them from the definition of income
or by granting exemption from income tax. §
Similarly, most states do not tax NGOs on private gifts
received, provided that the donor has not received a valuable benefit in return
for the gift. §
Most states distinguish between income from economic
activities that is "related" to the purposes of a PBO and income that
is "unrelated" to the purposes of a PBO by: (a)
exempting income of a related economic activity (e.g. the sale of books
& educational materials by a school); and (b)
taxing income of an unrelated economic activity (e.g. income received by
a school from renting empty rooms during a vacation period). The rationale for
this distinction is normally to prevent unfair competition between NGOs and
private enterprises in the same area. §
Most states allow PBOs to carry forward a surplus from one
year to future years, provided that the surplus is spent on the public benefit
purposes within a reasonable period of time. 3.
Income tax reliefs for donors §
Many states use a more restricted definition of PBOs to
determine which donations qualify for income tax relief for the donor than the
definition used to decide which PBOs receive exemption from income tax on their
income. §
Most states give some relief for gifts of money (other gifts
are difficult to value). §
Most states limit the maximum amount of relief to a fixed
amount or a percentage of taxable income. §
Most states give relief in the form of a deduction from
taxable income (a)
Research to date suggests that tax relief is more of an incentive for
richer donors than for everyone else, for example, if you have no money to give,
tax relief means nothing. Additionally, many people give to NGOs for humanitarian not economic
reasons. §
Simple procedures (e.g. workplace collections organised by
employers and report via the payroll) and a lot of publicity may be more
effective in raising levels of individual giving. 4.
Value Added Tax (VAT) on goods and services §
The VAT is a European tax on the provision of goods and
services as part of an economic activity that all EU member states (and all
states that wish to join the EU) must include in their national law. §
Exemption from charging VAT on sales is generally granted
according to the nature of the goods or services supplied, and not by reference
to the identity of the supplier. For
example, many supplies of education and hospital services are exempt, regardless
of the supplier is a business or a NGO. §
NGOs need to consider not only whether they have to charge
VAT on their sales but also whether they pay VAT on their purchases. §
Total (or partial) exemption from VAT means that a NGO cannot
recover any or part of the VAT paid on its purchases. § Some states have a special scheme where the government
compensates such NGOs that are wholly or partly exempt for portion of the VAT
that they have paid on their purchases. 5.
Local taxes §
Tax benefits are usually granted using the same principles
that are used in national tax laws. §
The decision to grant local tax benefits can be made by the:
(a) central government;
(b) local government independently of central government; or (c) local government within limits set by central government. D.
Delivery of tax benefits to NGOs §
Tax relief is a more flexible means of support than direct
grants. §
All states need a simple reporting system for all taxpayers
that are granted tax privileges so that they can measure the cost (in lost tax
revenue) of granting these tax privileges. §
Tax law is complex and tax advice is expensive. §
NGOs need help to obtain the benefits for which they are
eligible, and to comply with all the tax regulations. §
Tax authorities can help by co-ordinating the provision of
free tax information and basic advice on all taxes affecting NGOs. This may be
done via designated officials in designated tax offices with experience with NGO
tax laws. §
If tax benefits are granted without conditions and
verification procedures, there is a risk that a minority of NGOs will abuse the
system and damage the reputation of the whole NGO sector. §
Penalties for failure to comply with tax laws should be
reasonable in relation to the nature of the offence so that the financial
stability of an organisation is not at risk simply because it made an honest
mistake.
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