The International Journal
of Not-for-Profit Law
Volume 1, Issue 4, June 1999
Regional
Special Feature for the June Issue of IJNL: Income Tax Issues for NGOs in Anglophone Africa and its accompanying charts (see below for charts):
- Tax Exempt Activities
- Tax Exempt Income Types
- Tax Benefits for Donations
Income Tax Issues for NGOs in Anglophone Africa
Introduction
This paper discusses the current state of income[1] tax benefits for NGOs in Anglophone Africa [2] 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:
- they tend to be efficient and cost-effective providers of social services;
- they promote important civic values;
- they support charity and philanthropy;
- they encourage democracy and pluralism; and
- 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.
Notes
[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.| Country | Education | Charity | Religious | Amateur Sports | Other |
| Botswana | X | X | X | So long as not for acquisition of gain | Nature conservation and scientific research are permissible activities. |
| Cameroon | X | X | X | X | This does not include income from any clubs or restaurants associated with these organizations. |
| Egypt | X | X | X | This can be inferred from the amended version of Law 32, Art. 21 and the donation provision; health is also a permissible activity. | |
| Eritrea | X | X | X | X | It can be inferred that all activities except for trade will be exempt. |
| Ethiopia | There are no specific exemptions for NGOs. | ||||
| The Gambia | X | X | X | So long as income is not derived from any trade or business carried on by the institution. | |
| Ghana | X | X | X | So long as income is not derived from any trade or business carried on by the institution. | |
| Kenya | X | X
“Relief of poverty” |
X | X
|
“in so far as the Commissioner is satisfied that the income is to be expended either within Kenya or in circumstances in which the expenditure of that income is for purposes which result to the benefit of the residents of Kenya.” |
| Lesotho | X
It appears that the exemption applies only to scholarships. |
X | X | X | None of the assets may be used to confer a private benefit on any one person. |
| Liberia | X | X | X | ||
| Malawi | X | X | X | X[1] | Social welfare, civic improvement or other similar activities are also permissible. These exemptions do not apply to receipts or accruals derived from carrying on a trade or business. |
| Mauritius | X | X[2] | |||
| Namibia | X | X | X | X | |
| Nigeria | X | X | X | X | The law mentions benevolent and scientific activities as also being permissible. |
| Seychelles | X | X | X | X
However, cannot attempt to create a profit or gain for its members. |
Scientific activities are also permissible. |
| Sierra Leone | X | X | X | ||
| Somalia | X | X | X | Welfare and cultural activities are also permissible | |
| South Africa | X | X | X | X | See attachment for the proposal to revise the list of permissible activities to include 15 categories of activities. |
| Sudan | The Minister may make an order of exemption, but as far as we know none has been made. | ||||
| Swaziland | X | X | X | X
To the extent of mutual benefit and income is from dues. |
|
| Tanzania | X | X | X | Their money must be expended either in the United Republic or for purposes “which result to the benefit of the residents of the United Republic.” | |
| Uganda | X | X | X | X | None of the assets may be used to confer a private benefit on any one person. |
| Zambia | X | X | X | ||
| Zimbabwe | X | X | X | X |
| Country | Business Activity Allowed | Exemption of Investment Income | Exemption of Business Income |
| Botswana | X | X | X |
| Cameroon | X
Clubs are excluded. |
X | X
Income derived from clubs, restaurants, and bars is not included under this exemption. |
| Egypt | X |
The only mention of tax is for mobile income, which taxes investment income, and there is no exemption for NGOs |
Tax laws tax any entity on the commercial profit it earns. |
| Eritrea | X
Can be implied so long as it is not a trade. |
Art. 31 does not expressly mention the power of the Minister to exempt income of NGOs, but it may be possible for him to do so under clause 7. |
|
| Ethiopia |
Not Permitted |
Article 4 imposes tax upon all sources of income and does not exempt any specific sources. There is no mention of the power of the Minister to exempt income of NGOs, but it may be possible under clause 7. |
See Investment Income. |
| The Gambia | X | X | |
| Ghana | X | X | |
| Kenya | X
A distinction is made between related and unrelated activities. |
X
For sporting assocs., the income cannot be from investment. Rent is specifically excluded from taxable income. |
X
See Business Activity. |
| Lesotho | X | X
But only if the activity is ancillary to the organization’s charitable or non-profit functions. |
|
| Liberia | X
A distinction is made between related and unrelated activities. |
X
Only interest earned on property used for exempt purposes is exempt. |
X
Only that which is strictly related to the not-for-profit purpose. |
| Malawi | X
But only to an insubstantial degree. |
X | |
| Mauritius | X | X | X
As long as ALL income is paid to a charitable institution. |
| Namibia |
A distinction is made between related and unrelated activities. Some business activities are permitted, but only with permission of the Commissioner unless the business is acquired through a donation or gift.[1] |
X |
Only that which is strictly related to the not-for-profit purpose. |
| Nigeria | X |
There are no special rules on investment income. |
|
| Seychelles | X
But the purpose cannot be for profit or gain. |
X | |
| Sierra Leone | X
But income cannot be derived from trade or business.[2] |
X[3]
|
|
| Somalia | X | X |
Only income from buildings used for worship, cemeteries or schools is exempt. |
|
South Africa |
A distinction is made between related and unrelated activities. However, some business activities are permitted, but only with permission of the Commissioner unless the business is acquired through a donation or gift.[4] |
X |
Only that which is strictly related to the not-for-profit purpose. |
| Sudan | |||
| Swaziland | X | X
Clubs are excluded from this exception unless the Commissioner feels the amount of income is de minimus. |
X |
| Tanzania | X | X | X
If the income is spent on exempt activities. |
| Uganda | X
A distinction is made between related and unrelated activities |
Only rent from immovable property when the lessee is using the property for a charitable purpose. |
X
Only that which is strictly related to the not-for-profit purpose. |
| Zambia | X
A distinction is made between related and unrelated activities. |
X | X
If the income is spent on the exempt activities and either the business is carried on in the course or furtherance of the exempt purpose or the work involved is mainly carried out by the beneficiaries of those purposes. |
| Zimbabwe | X | X | X |
| Country | Business Donations | Individual Donations |
| Botswana | None. This is according to a law passed in 1995. | A donation of up to 20% of pre-tax income is permitted to be made to recommended educational institutions and sporting associations. There is a minimum donation of 1,000 Pula. This is according to a law passed in 1995. |
| Cameroon | A donation of .5% of profit may be made to an institution, established in Cameroon, whose purpose is serving public interest, or is of a philanthropic, educational, sporting scientific or social nature. This is according to a law passed in 1973. | None. This is according to a law passed in 1973. |
| Egypt | A donation of up to 7% of profits may be made to registered Egyptian charity organizations, social institutions, or educational or hospital organizations. This is according to a law passed in 1964, and amended in 1967. | A donation of up to 7% of income is permitted to be made. This is according to a law passed in 1964, and amended in 1967. |
| Eritrea | None.[1] | Same as business. |
| Ethiopia | None.[2] | Same as business. |
| The Gambia | None. | None. |
| Ghana | None. | None. |
| Kenya | None. | None. |
| Lesotho | None. | None. |
| Liberia | A donation of up to 15% of taxable income is permitted to be made for public purposes to accredited charitable, religious or education organizations. This is according to a law passed in 1977. | Same as business. |
| Malawi | None. | None. |
| Mauritius | A donation of up to 100,000 rupees may be made to a charitable institution. Contributions made to certified sports clubs and sports training centers may not exceed 500,000 rupees. This is according to a law passed in 1989 | None. |
| Namibia | § 18A provides that contributions up to a maximum of 5% of taxable income are entitled to a deduction. The donation must be made to a university, tertiary colleges, technikons or approved “educational fund;” vocational training or technical education; the education and training of religious and social workers or of physically or mentally handicapped; with the permission of the Minister of Finance, funds may be given to institutions established for the benefit of educational institutions outside the Republic. Provided the assets exceed R1 million, and they have been approved by the Minister of Finance, a fund may be devoted to primary and secondary education. This is according to a law passed in 1962. | § 18A provides that contributions up to a maximum of 2% of taxable income or R500,000 are entitled to a deduction. The donation must be made to a university, tertiary colleges, technikons or approved “educational fund;” vocational training or technical education; the education and training of religious and social workers or of physically or mentally handicapped; with the permission of the Minister of Finance, funds may be given to institutions established for the benefit of educational institutions outside the Republic. Provided the assets exceed R1 million, and they have been approved by the Minister of Finance, a fund may be devoted to primary and secondary education. This is according to a law passed in 1962. |
| Nigeria | A donation of up to 10% of income may be made to those ecclesiastical, charitable, benevolent and scientific organizations specified in the schedule. | None. |
| Seychelles | A deduction is permitted for a donation of at least 20 rupees to approved public funds, bodies or institutions. | Since individuals are not subject to income tax, the deduction does not to apply to them. |
| Sierra Leone | None.[3] | None. |
| Somalia | None. | None. |
| South Africa | § 18A provides that contributions up to a maximum of 5% of taxable income are entitled to a deduction. The donation must be made to a university, tertiary colleges, technikons or approved “educational fund;” vocational training or technical education; the education and training of religious and social workers or of physically or mentally handicapped; with the permission of the Minister of Finance, funds may be given to institutions established for the benefit of educational institutions outside the Republic. Provided the assets exceed R1 million, and they have been approved by the Minister of Finance, a fund may be devoted to primary and secondary education. This is according to a law passed in 1962. | § 18A provides that contributions up to a maximum of 2% of taxable income or R500,000 are entitled to a deduction. The donation must be made to a university, tertiary colleges, technikons or approved “educational fund;” vocational training or technical education; the education and training of religious and social workers or of physically or mentally handicapped; with the permission of the Minister of Finance, funds may be given to institutions established for the benefit of educational institutions outside the Republic. Provided the assets exceed R1 million, and they have been approved by the Minister of Finance, a fund may be devoted to primary and secondary education. This is according to a law passed in 1962. |
| Sudan | Under § 18 charitable deductions do not seem to be permitted because the law requires that expenditures be made for business purposes. However, § 20 allows for special deductions including donations in cash or kind, but essentially they must go to the government. This is according to a law passed in 1986. | Same as business. |
| Swaziland | Donations are permitted in very limited circumstances to specified institutions for scientific research and for national disaster relief. | Same as business. |
| Tanzania | In Zanzibar, under special legislation, contributions of up to 55% of gross profits are permitted to be made. Prior approval is required from the Minister. This is according to a law passed in 1973. | None. |
| Uganda | Up to 5% of income is permitted to be donated to amateur sporting and charitable organizations. When the contribution is of property, the deduction is limited to the lesser of the value or the consideration paid to acquire the property. This is according to a law passed in 1997. | Same as business. |
| Zambia | Up to 15% of pretax income may be donated to ecclesiastical, charitable, research or educational institutions and amateur sporting organizations, or any fund of a public character approved by the Minister. This is according to a law passed in 1989, and amended in July of 1996. | Same as business. |
| Zimbabwe | None.[4] | None. |
[2] Proc. No. 173, 1961 does not contain any benefits for gifts to charities.
[3] Under § 11 charitable deductions do not seem to be permitted because the law requires that expenditures be made for business purposes.
[4] Charitable deductions do not seem to be permitted because the law requires that expenditures be made for business purposes.