The International Journal
of Not-for-Profit Law
Volume 1, Issue 2, December 1998
CIVICUS Asia-Pacific Regional Assembly
CIVICUS held its second Asia-Pacific Regional Assembly in Bangkok from 14-16 December 1998. Entitled “Breaking the Barriers,” the conference covered a broad range of topics, including corporate-NGO-government partnerships, legal policy environments of citizen action, and the role CIVICUS can play in encouraging more inter-sector collaboration in meeting human needs. Attended by more than 60 delegates from the entire region, the conference provided a forum for lively interchange, as well as presentations of concrete examples of collaborative efforts in various countries. Members of the planning committee for the CIVICUS World Assembly ’99 in Manila described the ambitious logistical and agenda-building preparations already underway. That meeting is called “Towards a New Civil Society: The Changing Roles of Civil Society Organizations, Business, and Government” and is scheduled to be held September 21-24, 1999.
CIVICUS can be found on the web at: http://www.civicus.org
Tax Legislation: Australian Nonprofits to be Hit by a New Tax
The Australian Government has introduced into Parliament sixteen taxation bills to implement substantial taxation reform, including a goods and services tax. The 94,437 words of the bills were considered by the lower house of Parliament before Christmas and the Upper House (Senate) will form a number of committees to scrutinize the provisions early in 1999. The Government does not control the Senate and there are indications that amendments will be made to the Bills. The broad thrust of the reforms is similar to that announced by the Government prior to the recent federal election.
The Goods and Services Tax (GST) is a single rate tax of 10%. It is scheduled to commence on 1 July, 2000 just before the Olympic Games are held in Sydney. Athletes and sporting organisations participating in the Games may need to adjust their budgets and review existing contracts with Australian service providers. The transitional provisions are complex and may result in some unintended consequences for international nonprofit organisations.
The application of the GST to nonprofit organisations has proved a difficult issue for the Australian Government. Australian nonprofit organisations enjoy extensive exemption from income tax depending on the attributes of their legal form and dominant activity. There is no notion of unrelated business income for nonprofit organisations in Australian taxation law. This can promote unfair competition with for-profit traders who are subject to full taxation and it may distort markets. The GST is by its very nature a tax on transactions, rather than on the attributes of the organisation receiving or delivering the goods and services. The Government commissioned external consultants, led by Mr. Vos, to examine the definitions of nonprofit organisation transactions that were to be GST-free (zero rated). GST-free status means that an organisation can seek a refund from the Australian Taxation Office of any GST paid by previous suppliers (input tax) and does not pass on any GST in sales that it makes. Most of the recommendations of the Vos Report have been adopted by the Government.
Broadly, transactions involving health, education, child care, religious services and cars for use by disabled people will be classed as GST-free. Non-commercial activities of charities will also be regarded as GST-free. The Vos Report tries to draw the boundary lines as clearly as possible between what is a GST-free transaction and what is not. For example, pharmacy services are generally GST-free, but not if provided by an ambulance service. In addition, health services rendered for cosmetic reasons are not GST-free. In education, an accredited course, field trip and course materials are GST-free, but not a hobby course, membership of a student organisation or a hire, lease or sale of a student’s computer.
The most interesting GST-free classification is that of non-commercial activities of nonprofit organisations. A body that is a charitable institution, trustee of a charitable fund or a body to which gifts are regarded as tax deductible can sell goods for 50% of their cost to the organisations or value and the transaction will be classified as GST-free. Further, if second-hand goods are gifted to such organisations and then sold, the transaction will be GST-free, no matter what their cost or value. Many of Australia’s largest welfare providers collect second hand goods and then sell them through chains of thrift and second-hand shops. Some use the revenue to finance their operations, others sell at cost in order to directly benefit the poor. Such transactions will be GST-free, except where the second-hand goods are processed such as old clothes being turned into cleaning rags or blankets.
One of the 16 bills introduced into Parliament contains provisions designed to provide every business and enterprise in Australia with a unique numerical identifier. This will be kept on a data base operated by the Australian Taxation Office. The data base will include such details as name, address and industry classification. It is proposed to allow public access to such a data base and for it to be used by other levels of Australian Government as a single registration point for corporate entities. This will also include most nonprofit organisations, charitable trusts and activities. Australia for the first time will have a fairly comprehensive data base of nonprofit organisations.
The Senate Committee inquiry will include a focus on the impact of the tax reforms on nonprofit organisations and is required to report by 19 April, 1999. The Bills, reports and ongoing debate can be followed on http://www.taxreform.gov.au. The author has also established an e-mail list serve with interested Australian nonprofits and overseas VAT and GST nonprofit tax experts and if anyone wishes to join please send a message to PONC@QUT.EDU.AU requesting to join.
Myles McGregor-Lowndes BA, LLB, M.Admin, PHD is a Law Professor at the Queensland University of technology in Australia and a consultant specializing in nonprofit law to Dunhill Madden and Butler, lawyers (e-mail email@example.com).
1. Framework Legislation
On October 25, 1998 the State Council of the People’s Republic of China issued two new sets of regulations on “The Registration and Administration of (Social Organizations) Associations” (shehui tuanti dengji guanli tiaoli) and “The Registration and Management of People-Organized Non-Enterprise Units” (minban feiqiye danwei guanli zanxing tiaoli).” Long-awaited, these new regulations set out the terms and conditions for the registration of what can generically be called NGOs in China. However, they leave little room for the establishment of such organizations by private citizens, requiring that 50 individual members must come together to form an association or social organization. In addition, regulations on foreign NGOs have not as yet been issued, and a complete analysis of the current legal environment fro NGOs in China is thus not possible.
The new regulations keep in place the requirement that an NGO have a “lean and depend upon unit” (gua kao dan wei, known colloquially as the “mother-in-law.” Due to this requirement some “NGOs” have been formed in China as not-for-profit commercial companies. These include the “Global Village of Beijing,” an environmental organization which includes among its activities the production of a weekly television program called “Time for the Environment.” (see below for contact information) Other NGOs in China will continue to be sponsored by larger organizations, such as the All China Youth Federation, by ministries, by municipalities, etc.
Now that the new regulations have been promulgated, the Ministry of Civil Affairs (MOCA) is preparing to apply them to all existing and new NGOs in China. See the last issue of the Journal for a description of the MOCA reorganization, which occurred in August, 1998. MOCA is also working on the preparation of a comprehensive law for the NGO sector, which will resolve some of the continuing disparities about the regulation of various different types of NGOs. Further analysis of the new regulations will be available from ICNL once the official text of the regulations is available in English.
2. Tax Legislation
An article titled Options for Increasing U.S. Support for Chinese Nonprofit Organizations By Bob Boisture can be found in the International Grantmaking Section of this issue.
3. Research on the NGO Sector in China
Tsinghua University has recently established an NGO Research Center, within the Development Research Academy for the 21st Century. Zhao Li-Qing, the Chief Researcher for the Center, has written a paper entitled “Strategic Options for Building the Chinese NGO Sector in an Open World.” This paper is being published by ICNL as one of its occasional papers and can be obtained by contacting firstname.lastname@example.org.
4. Contact Information
Zhao Li-Qing of Tsinghua University can be contacted at email@example.com.
The 1998 Budget has changed the income tax treatment of educational institutions and hospitals existing solely for educational or philanthropic purposes and operating on not for profit basis. With effect from 1 April 1999, the tax treatment of such organisations varies according to their classification. The income of such organisations wholly or substantially funded by Government, or whose annual receipts do not exceed 1 crore (10 million) rupees, continues to be exempt without the need to file tax returns and without restrictions on the investments open to them. Other institutions outside these two categories have three options:
- to claim exemption by application to the Central Board of Direct Taxes;
- to claim exemption as a charitable trust by application for registration under section 12A of the Income Tax Act; or
- not to claim any of the above exemptions.
Under the first option, income will be fully exempt and no tax returns are required, but separate accounting records for non-philanthropic income must be kept and all investments other than those prescribed for charitable trusts must be disposed of by 30 March 2001. Under the second option, income will be exempt only to the extent applied for the charitable objects of the institution and subject to: a minimum application requirement of 75% of annual income; immediate disposal of non-prescribed investments; maintenance of separate accounts for non-philanthropic income; and annual filing of tax returns. Under the third option, dividends will be exempt but other income will be liable to 30% income tax and assets other than shares and buildings used for the purposes of the institution will be liable to wealth tax; however, no restrictions will be imposed on the current or future investments of the institution (Section 10 (23C) of the Income Tax Act, as amended by Finance (No. 2) Act 1998).
The Budget included a new tax relief for donations to a National Sports Fund and a National Cultural Fund to be set up by the Government. In both cases the relief takes the form of a full deduction for the donation in computing taxable income. (Section 80G of the Income Tax Act, as amended by Finance (No. 2) Act 1998).
See also in this issue: A review of the recent case Trustees of Sahebzadi Oalia Kulsum Trust v Controller of Estate Duty
In March 1998 the Japanese Diet promulgated a new “Law to Promote Specified Nonprofit Activities.” [To view in English http://www.vcom.or.jp/english/index.html, in Japanese http://c-s.vcom.or.jp] The new law went into effect on December 1, 1998, as the result of a cabinet order, as provided in the legislation. To mark the occasion, “NGO Day” celebrations were held around the country. Regulations and implementing guidelines have begun to be issued.
Summary of the Law
The “specified nonprofit activities” defined in the Law include the promotion of health, welfare, social education, community development, culture, art, sports, community safety, human rights, peace, international cooperation, equal gender participation, nurturing of youth, conservation of the environment, and disaster relief. Organizations come under the new Law if they engage in one or more of the above activities or provide liaison, advice, or assistance in connection with such activities. There is a specific directive that these categories are to be interpreted so as to include a wide array of activities.
An organization is a “specified nonprofit corporation” if its principal purpose is the implementation of specified nonprofit activities and —
- It is not for the purpose of generating profits,
- Its provisions for acquisition and loss of membership are not unreasonable,
- The number of officers receiving remuneration total no more than one-third of the total number of officers,
- It is not for the purpose of propagating religious teachings, performing ceremonies, or education or fostering believers,
- The activities are not for the purpose of promoting, supporting, or opposing a political principle or a candidate for public office, a person holding public office, or a political party, and
- It does not engage in operations for the interests of a specified individual or corporation and is not used for a specific political party.
Economic activities. Although a specified nonprofit corporation (SNC) cannot have profit generation as its purpose, it may engage in operations to generate revenue to support its nonprofit activities so long as the revenue generating activities do not interfere with its nonprofit activities and separate accounts are maintained. The types and particulars about any revenue generating activities must be stated in the articles of incorporation.
Name. Only an organization that meets the requirements of the new Law can use “specified nonprofit corporation” in its name. Procedures for registering SNCs and implementing the new Law are to be promulgated by cabinet order. If an SNC operates in only one prefecture, it is supervised by the governor of that prefectures; all others are supervised by the Economic Planning Agency.
Registration. To register an SNC the following documents must be submitted:
- Articles of incorporation,
- A list of the names and addresses of all initial officers, who must be listed in the articles of incorporation,
- Letters of acceptance from each officer
- Affidavits from each officer that he or she is not incompetent, bankrupt, a person who has been sentenced to imprisonment for at least two years, a person fined under the laws dealing with gangsters and/or violent acts for a least two years, a person who was an officer of an SNC that was involuntarily terminated within the last two years, or a person who is a spouse or a relative within the third degree of sanguinity of any officer,
- A list of at least ten individual or corporate members, together with their addresses,
- A document verifying that the organization is not for the purpose of promoting religion or promoting or opposing political principles, political parties, public officials, or candidates for public office,
- A document verifying that the organization is not a gangster organization or a violent criminal organization within the meaning of the laws applicable to such organizations,
- A prospectus,
- A list of promoters, with names and addresses,
- A certified copy of minutes attesting to the decision of intent to become an SNC,
- An inventory of assets,
- A document stating what the organizations fiscal year will be,
- A two-year operating plan, and
- A two-year budget of anticipated revenues and expenditures.
Public inspection, time limits, reasons for denial. Once the application has been filed, the government agency must make the articles of incorporation, the list of officers, the prospectus, the operating plan, and the budget available for public inspection for two months. If the organization files the required documents and they are accurate, the organization has a right to be registered as an SNC. A decision to grant or deny registration must be made within two months after the period for public examination has expired. If registration is denied, the government agency must promptly provide a written statement of its reasons.
Directors and auditors. An SNC must have at least three or more directors and one or more auditors. Decisions of the SNC must be taken by majority vote of the directors unless it is specified otherwise in the articles of incorporation. The auditors, one or more, must inspect the status of the operations and assets of the SNC and report any irregularities to the general meeting of members or the government agency with jurisdiction. An auditor may not be a director or employee of the SNC.
Officers. The government agency must be promptly notified of any change in the name or address of an officer. If a new officer is appointed or elected, the same information set out above for the initial officers must also be filed. Officers may not serve terms of longer than two years, but they may be reappointed.
Amendments to Articles. Unless otherwise provided in the articles of incorporation, those articles may be amended only by a three-fourths vote at a general meeting of members at which at least one-half of the members are present. No amendment of the articles is valid until approved by the government agency with jurisdiction.
Reports. Within three months following the end of its fiscal year, each SNC must file financial statements and an activity report with the Economic Planning Agency, which must distribute them to any prefectural governor with jurisdiction. In addition, each SNC must file a list of the names and addresses of all individuals who were officers during the year, indicating which of them received remuneration, and a list with the names and addresses of at least ten members. Any member or other “interested party” is entitled to see these reports unless there is a “just and proper reason” for not making them available. Under rules to be prescribed by the Prime Minister’s Office, members of the public are also entitled to view any reports at the government agency with jurisdiction over an SNC.
Dissolution. An SNC can be dissolved —
- By a resolution of a general meeting of members,
- Occurrence of any reason for dissolution specified in the articles of incorporation,
- The impossibility of successful performance of operations relating to the nonprofit activities that are its objective;
- Absence of members,
- Merger, or
Remaining assets. The articles of association must specify the means for dissolving the SNC, and upon dissolution any remaining assets can only go to another SNC, the government, or certain specified types of social welfare organizations.
Notice of need to correct. If the government agency with jurisdiction determines that an SNC does not have specified nonprofit activities as its primary purpose, is a gangster or violent organization, does not have ten members, or otherwise violates laws, regulations, administrative orders based on law, its own articles of incorporation, or has operations that are “materially lacking in propriety,” it may order the SNC to take measures within a specified period to correct the situation. If corrections are not made, the government agency can dissolve the organization. Further, any person who violates an order to correct, as well as the SNC itself, is subject to a fine not exceeding 500,000 yen (approximately $4,400).
Involuntary dissolution. If the SNC has violated laws or regulations and it is clear that improvement cannot be expected as a result of an order to correct and the objectives of supervision cannot be fulfilled through other means, the government agency can dissolve the organization without first issuing an order to correct. When the government agency orders dissolution, either with or without first issuing an order to correct, the SNC may request a public hearing, and “efforts must be made” to hold such a hearing. If public hearings are not held when requested, the government must give the SNC a written statement of its reasons for not holding one.
Merger. Upon submission of all of the documents and information required for the establishment of an SNC, and the approval of the supervising agency, one SNC may be merged with another. Creditors must be given at least two weeks to object to any merger. If any creditor objects, the SNC must satisfy that creditor’s claims or give the creditor sufficient assets to guaranty payment, unless there is no possibility that the merger will harm that creditor. Unless provided for differently in the articles of incorporation, merger requires a three-fourths vote of members at a general meeting. The SNC that survives or results from a merger succeeds to all the rights and obligations of the SNC(s) that cease to exist because of the merger.
Investigative powers. If there is “sufficient reason to suspect” that an SNC has violated any law, regulation, administrative order, or its own articles of incorporation, the supervising government agency can request a report from the SNC or inspect the books, records, and other materials of the organization. Upon request the SNC being investigated is entitled to a statement of why the government agency believes that there is “sufficient reason to suspect.”
Taxes. SNCs appear to be exempted from the corporate tax, the consumption tax, the land value tax, and local taxes.
Review. Specific provision is made to review the operation of the law within three years from its effective date.
The new Japanese Law to Promote Specified Nonprofit Activities has many good features. For example, the definition of permissible activities is quite broad, covering most generally accepted areas of public benefit activity. Major areas that do not appear to be covered by the Law are research, education, and religion, but these areas appear to be dealt with adequately in other legislation. It is also good that each Specified Nonprofit Corporation (SNC) will need to report to only one governmental agency – either the local prefectural governor or the Economic Planning Agency. This is a major improvement over the old system, under which each separate ministry supervised the charities within its area of competence. The tax benefits for SNCs also seem to be good, although it is not known whether there is a deduction or credit for contributions to SNCs.
Unfortunately, there are also major defects or shortcomings in the Law. The requirement that two-thirds of the officers must be unpaid places great emphasis on volunteerism. This provision does not seem realistic for a major charity in the modern world, however, and it is likely to be avoided by the appointment of numerous nominal officers who would “serve” without pay.
The prohibition of any political activities will prevent SNCs from playing their appropriate role as advocates on issues of public importance. Moreover, this provision is of doubtful legality under the International Covenant on Civil and Political Rights (ICCPR) in light of the decisions by the European Court of Human Rights in Sidiropoulos and Others v. Greece and United Communist Party of Turkey v. Turkey.
Japan was one of the first nations to ratify the ICCPR, which has now been adopted by over 140 countries. Articles 10 and 11 of the European Convention on Human Rights, protecting the freedom of speech and association, are essentially the same as Articles 19 and 22 of the ICCPR. Thus, decisions of the European Court for Human Rights, which are final and not subject to review, are directly relevant to interpreting and applying Article 22 of the ICCPR. A strong argument can be made under these conventions as interpreted by the European Court of Human Rights that the public discussion of issues, which is essential to democracy, can be effective only if organizations like SNCs are given the right to advocate for or against particular ideas or policies.
Under both the ECHR and the ICCPR, the freedom of speech or the freedom of association can be restricted only (i) in the interests of national security or public safety, (ii) for the prevention of disorder or crime, (iii) for the protection of health or morals, or (iv) for the protection of the rights or freedoms of others. None of these would seem to provide any ground for muzzling SNCs in modern Japan. Further, any restrictions must be “prescribed by law, ” and they must be “necessary in a democracy” to achieve one of the four listed objectives. In both the Sidiropoulos and Communist Party cases, the Court emphasized that exceptions must be “construed strictly,” that only “clear and compelling” reasons can justify restrictions, that any restrictions must be “proportional to the legitimate end pursued,” and that there must be “relevant and sufficient” evidence and “decisions based on an acceptable assessment of the relevant facts” before a restriction can be justified. The flat prohibition on advocacy in the new Japanese Law raises serious international law questions in light of these recent decisions.
Another unfortunate feature of the Law is the onerous filing requirements for establishing an SNC. Too much information is required and there are too many provisions that could be used by government bureaucrats to deny registration. For example, there should be no requirement of filing budgets and operating plans for two years. Requirements like these invite bureaucrats to deny registration because they regard the budgets and plans as inadequate or unrealistic. This is not an appropriate role for the government to play. Effective SNCs will grow and thrive, and poor ones will wither and die. The “marketplace” for charities will sort out the strong SNCs from the weak ones. It is not appropriate for the government to seek to make decisions like this at the registration stage – or any other stage.
Although the new Law could be administered in a fair and non-repressive manner, there are too many aspects of it that could be interpreted or applied to stifle SNCs. For example, the government’s right to dissolve an SNC if its activities “materially lack propriety” might lead the government to shut down SNCs of which it does not approve.
As with all laws, whether the new Japanese Law will turn out to be supportive of a stronger and more successful not-for-profit sector in Japan will depend largely on whether it is interpreted and administered wisely and flexibly. If the good provisions of the Law – and there are many of them – are fully utilized and the potentially abusive powers of government are used to the least possible extent, the Law may well create the kind of supportive legal environment that will help a stronger civil society to bloom and grow in Japan.
According to a recent newspaper poll, 32 out of Japan’s 47 prefectures have indicated that they intend to offer local SNCs tax exempt status.
VAT was introduced on 1 July 1998 at a standard rate of 10%, later increased by an amending law to 13% with effect from 1 September 1998. The tax applies to the sale of goods and services in Mongolia and the import of goods by individuals and legal persons. There is no general exemption for NGOs but exempt goods and services include: goods funded by grants from foreign NGOs, international organisations and charities; educational and medical services; artistic and physical culture services; religious services; and services for prevention and relief of natural disasters. (Value Added Tax Law, Article 9).
The establishment of multi-party democracy in Nepal in 1990 resulted in the establishment of a large number of NGOs, at both the national and local levels. According to a recent article in the Katmandu Spotlight, there were less than 500 registered NGOs in Nepal prior to 1990, while now there are more than 30,000. According to Shambhu Lama, writing in the Katmandu Telegraph, the scale and operation of NGOs have grown enormously. As a result, the net volume of aid transfers through NGOs from counterparts in western countries and bilateral and multilateral institutions is significant compared to the official development assistance that is channeled through the Ministry of Finance. The Spotlight estimates that $150,000,000 is now flowing annually to domestic and international NGOs in Nepal.
This represents a dramatic change. For the forty years preceding the 1991 Constitution, foreign assistance to Nepal had to flow through the government’s consolidated fund. This device provided the government with both information about foreign assistance and a large measure of control over it. After 1991 foreign funds could flow directly to domestic or international NGOs.
Ostensibly to address problems caused by this change, in September 1998 the Home Ministry in Nepal sent a “circular” to its field offices stating that it was necessary for NGOs to obtain permission from the concerned ministry of government before proposing any projects or programs that would involve foreign grants. Under the circular, the government must approve each program before foreign funding can be received.
NGOs in Nepal objected strongly to this new rule. Under the umbrella of the NGO Federation, they met with the Home Ministry in Katmandu. The Home Ministry responded by saying that the circular had been prepared at the suggestion of the Ministry of Finance.
The NGO Federation then approached the Ministry of Finance, which apparently explained that it was seeking better information about the flow of funds from abroad to NGOs in Nepal. NGOs responded that the circular goes well beyond mere collection of information and should be withdrawn. The NGOs also argued that the annual activity and financial reports that each NGO must file with the Social Welfare Council and the Central District Office provide sufficient information on development projects and the flow of funds. The NGO Federation took the further position that policy directives affecting NGOs should not be issued without consultation with the sector.
The Ministry responded that in fact neither the SWC nor the District Offices had collected meaningful financial or activity reports on NGOs. Further, it argued that there was nothing new in the circular, for the articles of association of every NGO in Nepal is required to contain a provision that government approval must be sought prior to receiving any foreign funding. The Ministry accordingly claimed that the circular merely enforces existing rules.
The NGOs have not denied that the Ministry is entitled to information, but have argued that the method adopted in the circular is not practical. In response to this impasse, a task force has apparently been set up with representation from the NGO sector, the Social Welfare Council, and the government line ministries to develop a strategy and plan of action. The issues considered may be broadened to include other points of friction, such as the need for Nepalese NGOs to receive annual recertification in order to continue in existence. The District Offices are apparently now demanding information on finances and activities from NGOs seeking recertification, but many NGOs have yet to comply.
The Social Welfare Council was apparently established as a parastatal apex body about ten years ago. Its purpose was to make grants to NGOs to support various social development and welfare programs and to register NGOs for eligibility to receive these grants. There was no obligation to register with the SWC, however, and most NGOs have chosen not to register. According to the Auditor General’s report for 1996-97, although about 800 NGOs are registered with the SWC, it does not have accurate records on them, nor does it have activity and financial reports from them.
The problems with the SWC apparently have a political origin. There have been a number of governments since 1990, and often each new government replaced the members of the Council and the staff. According to reports, this facilitated the ability of NGOs with personal or political contacts with that government to access the grant funds that the SWC had. The result in the end, however, has been that the SWC lost credibility with the government, NGOs, and the public. In consequence, the Council had been defunct for over a year. Apparently part of the government’s concern in issuing the new circular was that the Council was not playing its role of information gathering and coordination and was thought to lack direction or vision.
The current crisis over foreign funding has apparently been seen as an opportunity to rejuvenate the Council. The intention was that the Council should take the lead in bringing NGOs and the government together and finding a resolution to the problem. To date, however, no agreed position has been reached and the circular remains in place.
In order to ensure competitive neutrality between local government and the private sector, the Government enacted a new provision that Local Authority Trading Enterprises (LATEs) shall no longer be entitled to exemption from income tax or district improvement income tax. The implementation of this change has been deferred to the income year beginning 1 April 1999 to allow the Government further time to consider whether the wide definition of LATEs needs to be clarified to avoid catching unintentionally a significant number of local organisations with local authority representatives on their boards (Taxation (Remedial Provisions) Act 1998).
1. Framework Legislation
The Securities and Exchange Commission (SEC) has opined that an increase in the contributed capital of a non-stock non-profit corporation does not require an amendment of the articles of incorporation (SEC Opinion dated 2 April 1998).
The SEC has also opined that a religious denomination, sect, church or group is not required to be registered under the Corporation Code, but that any such group that wishes to acquire a separate legal personality from its members should incorporate by registering under the Code as a corporation sole, a corporation aggregate/religious society, or an ordinary religious non-stock corporation (SEC Opinion dated 15 June 1998).
2. Tax Legislation
a. Tax Incentives for Donors
The Government’s Comprehensive Tax Reform Plan was signed into law on 11 December 1997 and took effect on 1 January 1998. The new law increases the deduction for income tax purposes of charitable donations to accredited non-stock, non-profit corporations. For individuals, the maximum allowable charitable contributions are increased to 10% (from 6%) of net income (before contributions) and, for corporations, to 5% (from 3%) of net income. In addition, a new class of charitable donee was created – these are called NGOs, and they may receive fully deductible gifts. In order to qualify as an NGO, an organization otherwise qualifying as a charitable donee must meet certain tests, including the requirement that its income must be utilized “directly for the active conduct” of its purposes; its administrative expenses must not exceed 30%; and its assets must go to a similar and duly accredited organization upon dissolution (for further discussion of issues regarding accreditation of organizations, see discussion in b., below.) Another change concerns charitable contributions of property: the allowable amount is now based on the acquisition cost of the property whereas previously it was based on its fair market value (Tax Reform Act of 1997, Republic Act No. 8424).
A separate law approved on 14 February 1998 introduces a new incentive for private sector entities to support public schools. Under the government’s “Adopt-a-School Program”, a private entity is allowed to provide support to an elementary, secondary or tertiary public school located in any of the 20 poorest provinces (designated by the Presidential Council for Countryside Development or any other responsible government agency) in the following areas:
- staff and faculty development for training and further education;
- construction of facilities;
- upgrading of existing facilities, provision of publications and other instructional materials; or
- modernisation of teaching technology.
The support is governed by a Memorandum of Agreement (MOA) for a minimum period of 2 years between the private entity and the school. The MOA is subject to approval and review by the Superintendent of Schools for the relevant province or district.
The tax incentive takes the form of an additional deduction from gross income equal to 50% of the expenditure incurred by the private entity. Non-monetary assistance is valued on the basis of the acquisition cost of the property provided, taking into account the depreciated value of used property (Republic Act 8525).
The BIR has also ruled that, for the purposes of determining the value of three gifts of real property to a university that can be deducted in computing taxable income, the zonal values rather than the market values of the properties are to be used (BIR Ruling 44-98 dated 14 April 1998).
b. Qualification for the status of being an organization to which tax deductible corporate and individual gifts can be made – the Philippine Council for NGO Certifications (PCNC) and its new procedures.
On December 8, 1998, the Philippine Department of Finance issued Revenue Regulation No. 13-98, which implements changes to the Tax Code of the Philippines made in 1997. Under those tax code changes, the government was authorized to establish a relationship with a private “Accrediting Entity,” which will permit that entity to accredit NGOs as “qualified donee institutions” under Philippine law. The PCNC was formed by the Caucus of Development NGO Networks, Philippine Business for Social Progress, the Association of Foundations, the League of Corporate Foundations, the Bishops-Businessmen’s Conference for Human Development, and the National Council for Social Development Foundation. This new regulation implements the work of the PCNC and establishes its relationship with the Department of Finance (DF) and the Bureau of Internal Revenue (BIR).
The 1997 tax legislation in the Philippines, pursuant to which the PCNC was established, is noteworthy because it for the first time delegates to a private body the power to decide whether a not-for-profit organization qualifies to be a donee to which deductible contributions can be made. This is a significant step in the direction of self-regulation for the not-for-profit sector, and it is one worth watching as the accreditation processes of the PCNC develop.
The rules issued by the DF to govern the PCNC and its operations specify quite clearly the ways in which it is to operate and the criteria it is to take into account in accrediting non-stock, non-profit organizations and NGOs. By setting up a two-tier structure for benefits for donors, depending on whether an organization qualifies as an “NGO,” the legislation and the implementing regulations have made the work of the accrediting agency rather difficult. It will need to specify rules and forms for both types of organizations and train the evaluators about what to look for with respect to each of the two types. Nonetheless, the regulations give significant guidance about how this is to be done, setting criteria to be taken into account for accreditation, and spelling out in detail the reporting requirements for both donors and accredited organizations.
A longer analysis of the legislation and the implementation guidelines will be found in the next issue of the Journal.
Framework and Tax Legislation
The laws for NGOs in Thailand are complex. Many different agencies of the government must be involved and bureaucratic delays and denials are frequent. In consequence, only about 300 NGOs have full tax benefits. In the current financial crisis, the Ministry of Finance has been particularly reluctant to issue new grants of exemption from taxes and customs duties. In order to obtain exemption from taxes (e.g., VAT, land tax, customs duties), an NGO must show that it spent no more than twenty-five percent of its budget on overhead for the two years prior to the application for exemption, a test that is very had to pass.
The new Constitution adopted in 1997 recognizes many human rights, including the freedom of association, but there is a need to adopt organic laws to implement these guaranteed freedoms. In addition, the Constitution states that no law dealing with education, health, or welfare can be enacted until it has been approved by committees that have NGOs among their members. It is not clear how NGOs are to be selected for these committees. In another innovation, the new National Social Policy Committee that was set up in July 1998 to oversee all issues of social policy will have a subcommittee on NGOs. Finally, there is also a general need to repeal or amend old laws to make the laws consistent with the new Constitution.
With respect to laws affecting NGOs, a dedicated group of lawyers has been working to develop a new comprehensive law. The draft has many interesting provisions. For example, it would establish “one-stop” filing under the aegis of the Ministry of Labor and Social Welfare. This Ministry would have the right to register NGOs and grant them full tax benefits without the need to have recourse to any other ministry. The bill would establish a new council to oversee registration of NGOs and the granting of tax benefits. This council would have eight representatives from the government, eight from the NGO sector, and eight distinguished citizens or experts. This structure would, in effect, give the public an equal voice with the government and NGOs in the administration of the new law. The council would have great prominence, for it would be chaired by the Prime Minister. The bill would also establish a new government fund for making grants to NGOs, with an initial capitalization of two billion baht (approximately $55 million US).
The draft law has been included in the omnibus bill dealing with labor and social welfare that is pending before the Parliament. This bill has 50 chapters and deals comprehensively with issues affecting the entire field of labor and social welfare. It is only one of many bills pending in the Parliament, and it is not currently at or near the top of the priority list. Accordingly, it is uncertain when or whether the new legislation will be adopted.
According to sources at PACCOM, the current view is that regulation of the not-for-profit nongovernment sector in Vietnam should proceed by the enactment of a new law to supplement that earlier Law on the Freedom to Establish Associations from 1957 and the Civil Code from 1995. It is thought that such an enactment would provide more permanence than regulations. A working group has completed a draft law, which is currently being circulated among the ministries and the appropriate party organs. Although it has reached this crucial stage, it is not high on the agenda of the government, which has many other laws to consider.
The approach being taken would establish three levels of organizations –
- those that are national and that will continue to be registered at the national level;
- those that are set up at the local or district level by national level organizations, which will continue to be registered at the local or district level by the local or district authorities; and
- those that are set up by private individuals for their own mutually beneficial purposes or for the public good; those will need to be registered at the local or district level under the new law, as the present regulations do not presently provide for them.
With respect to the third kind of organizations, there seems to be a renaissance of associational activity in Vietnam. For example, many clubs and other associations are being established for mutual benefit – for example, farmers are setting up associations to learn more about pig farming. And art enthusiasts are setting up clubs to learn about art. In addition, certain other individuals are setting up organizations to benefit the public, for example, doctors who seek to provide better health education services in a local neighborhood. It is the view of the Vietnamese government that all such organizations are good for society as long as they operate in an accountable fashion. For further information on the development of the new regulations in Vietnam, please contact Phan Trong Thai at (84 4) 845 2007.