The International Journal
of Not-for-Profit Law
Volume 2, Issue 4, June 2000
In contrast to the period of 1993-1995, when there was great disagreement between NGOs and government over the development of a new policy and legal framework for Ghanaian NGOs, the current process seems to have been developing in a very cordial and collaborative manner. The NGOs have formed a new entity, called the National Consultative Group (NCG), which is made up of national, regional, and sector networks and umbrella organizations. The government ministry responsible for supervising NGO activities, the Ministry of Employment and Social Welfare (MESW), circulated a draft policy paper and then asked a consultant, the Institute for Democratic Governance (IDEG), to help create a new policy discussion draft, to reflect NGO concerns raised at a February 1999 meeting and subsequent meetings between NCG and MESW . That new draft, entitled “Comprehensive Policy Framework for the Non-Profit Sector in Ghana,” is now available for discussion.
NCG and MESW have agreed to a new process of consultation to take the discussions forward The plan is to hold four regional meetings followed by a national workshop, and that process is expected to begin in August. A certain amount of work has already been done in identifying the issues that need to be discussed with regard to the existing and any proposed new legal framework. The following excerpt from the IDEG report illuminates the issues:
6.1 Legal Framework
The Companies Code/Act 179 (1963), Chapters 5 (21) and 6 (37 (1)(2)(3)) of the Constitution of the Fourth Republic (1992), and Act…. that define the legal institutional framework within which NGOs and other CSOs operate in Ghana. The NGO Bill (1993) was never enacted into law and therefore does not form part of the legal framework. In addition to these laws, administrative rules and regulations have occasionally been issued as Cabinet Directives to Government MDAs that deal with NGOs.
In their campaign against the enactment of the infamous NGO Bill (1993), NGOs argued that there was no need for new legislation to regulate them because Act 179 –the Companies Code- was adequate for their purpose. The Code prescribes the minimal requirements for registration and defines the rules and regulations for conducting business under the terms of the Code. Organisations are expected to file annual activity reports and audited accounts, with the Registrar General or appropriate agency of Government. NGOs claim that they have been submitting such reports to Government offices as well as to donors. However, they allege that the reports are not used.
Government, for its part, counters this claim by arguing that many of the NGOs, if not the majority of them, often fail to file reports with the sector Ministry and its agencies. In cases where the Ministry has requested information on their activities NGOs have been not been co-operative. Government, judging from its drafting of the NGO Bill (1993), clearly does not share the view that the Companies Code and the Constitution (1992) alone adequately provide for effective governance of its relations with NGOs. Government further argues that the Companies Code (1963) was formulated in circumstances that were different from those within which NGOs have recently emerged, and also aimed at dealing with problems and challenges that are not quite identical to those confronting NGO-Government relations as a major social force.
The above arguments and counter-arguments suggest that there is no consensus among NGOs and Government on the adequacy of the existing legal framework. Within the machinery of itself, the inadequacy of the existing legal framework is often manifested at the level of inter-ministerial co-ordination of relations with NGOs. For example, the location of responsibility for the enforcement of compliance with the Companies Code is a problem within the government machinery. Whilst, it should appear logical for the sector Ministry, i.e. the MESW, to play the role of enforcer, it is not obvious from the Code whether it has that mandate. Hence, the situation where line ministries and the sector Ministry work in parallel to, rather than in co-ordination with each other. Furthermore, with the exception of the Constitution (1992), existing laws narrowly focus on NGOs and their associated regulatory issues. For example, legislation like the NGO Bill (1993) did not only look at NGOs and their functions in extremely narrow terms but also overlooked the needs of other civil society organisations that also operate in the non-profit sector.
The limitations of the Companies Code and other legislation, including administrative rules and regulations, are such that they cannot serve the needs of the developing non-profit sector without far-reaching reform of the law. Needless to say, it would be useful to retain those parts of the Companies Code that are still relevant to the operations of NGOs and other CSOs and improve those aspects that have become redundant or ineffective. New elements can be elaborated to improve the adequacy of the existing legal framework, making it more coherent and responsive to the challenges of the proposed partnership relations. In order words, a new law suitable to the forging strong partnership relations between diverse non-profit organisations and Government and donors may have to be enacted.
A practical problem thus arises in Ghana, like many of the other former British colonies in Africa, about the appropriateness of the existing legal rules at a time when the not-for-profit sector has evolved from being one primarily concerned with service provision in the fields of charity and social welfare to being one concerned with social and economic development. Another aspect of the issue obviously concerns sources of funding, with many NGOs now having access to foreign donors that can support their operations and make them wholly independent of the need for government support.
The evolution of the current process in Ghana will be discussed in future issues of the Journal. Further information about developments there can be obtained from Emanuel Akwety of IDEG at email@example.com.
Draft Tax Legislation in South Africa
Legislation affecting the tax regime for NGOs in South Africa has been sent to Parliament as part of a general Revenue Law Amendment Bill. This is due to be taken up when Parliament reconvenes in August. The proposed amendments to the existing tax legislation would create a new category of organizations exempt from income tax – public benefit organizations (PBOs) — and they would broaden the categories of such organizations to which tax deductible contributions can be made. These are significant steps and their development is to be applauded. There are, however, some problems in the proposals as currently drafted, as the following discussion will make clear. This paper provides a preliminary analysis of the proposals and looks at ways to correct possible problems with the existing draft.
The legislation and the draft explanatory memorandum are both available on the ICNL web site. ICNL is indebted to Richard Rosenthal, an attorney in Cape Town, for providing us with the legislative materials.
1. Tax Exempt Status Generally. There are numerous proposed improvements over the current regime.
- First, the legislation clarifies and simplifies the old law, substituting the new concept of “public benefit organization” for the notion of charity and eliminating the previous mysterious set of rules differentiating between “funds” and “institutions.”
- Second, the legislation provides a flexible means to update and modernize the list of public benefit activities, by providing that the Minister of Finance must publish the list of such activities in the Gazette (this list is, however, to be incorporated in the Act within a year of its promulgation in the Gazette, and that requirement reduces future flexibility).
- Third, the legislation is well-coordinated with the 1997 Non-profit Organisations Act (NPO Act), which means that satisfaction of the voluntary registration requirements of that Act, along with the additional requirements of the new tax rules, will allow a PBO to be exempt from income tax.
- Fourth, it provides an affirmative obligation that the Commissioner of Revenue must approve an organization that meets its requirements.
Within this overall scheme there are also several complicated new requirements that PBOs must meet.
The requirements of the definitional section, include the following:
For activities –
- they must be on the list determined by the Minister;
- they may include providing funds to carry out activities;
- the Minister’s list is to include activities “of a philanthropic or benevolent nature, having regard to the needs, interests and well-being of the general public for the purposes of this section.”
For an organization –
- it must be “of a public character;”
- its “sole object” must be to carry on one or more “public benefit activities” “in a non-profit manner;”
- it must carry out all or almost all its PB activities in South Africa;
- a copy of the organization’s constitution must be submitted to the Commissioner, and it must ;
- require that the organization have at least three independent fiduciaries (on whom compliance obligations are imposed, with criminal penalties to apply for failure to comply with the law);
- contain provisions setting out the nondistribution constraint (see below for further explanation)
- contain provisions restricting investments (see below for further explanation);
- prohibit the organization from carrying out any business undertaking or trading activity except within specific parameters (see below for further explanation);
- prohibit the organization from accepting certain restricted gifts;
- require the organization to submit any amendments to the constitution to the Commissioner;
- the organization and its principals must not have been involved in tax avoidance;
- the organization must pay only reasonable amounts of compensation (reasonable to be determined with reference to the sector and the service preformed);
- the organization must comply with the reporting requirements of the tax law;
- the organization must exercise a certain amount of expenditure responsibility to ensure that its funds are utilized for public benefit purposes; and
- it must be registered under the NPO Act.
The proposed changes also include a delegation to the Commissioner to write regulations further clarifying the legislation to “ensure that activities and resources of [organizations] are directed to furtherance of” their objects, a document retention policy for all PBOs, as well as procedural rules applicable to decisions by the Commissioner to withdraw approval of an organization.
In general these changes are welcome ones. They would greatly clarify and generally broaden the current tax landscape for PBOs and, despite some infelicitous wording, they should be enacted substantially as written. But there are still problems with the overall scope of the exemption requirements. For example, how does one deal with a an organization whose activities are fairly limited in scope, e.g., relieving the sufferers from a rare disease or showing art objects from an obscure country or region? Do these objects have regard to the “needs, interests, and well-being of the general public?” In most common law countries they would be considered to be “charitable.” But the experience of Australia, where the formulation is “public benevolent institution,” suggests that limiting legislative language may easily be applied in ways that stifle aspects of third sector development. In addition, this proposed legislation makes no mention of one of the issues that has plagued most common law countries, the whole question of whether advocacy constitutes a charitable activity and, if yes, to what extent. Some of the definitional issues raised in this paper might well be re-considered before the final version of the legislation is approved by Parliament. In addition, attention will need to be paid to the formulation of the required list. The list developed for the Katz Commission is an excellent place to start.
2. The Nondistribution Constraint. The statement in the proposed legislation of the nondistribution constraint is complex, particularly with respect to interim, nonliquidating distributions. With respect to liquidating distributions the rule is fairly simple and straightforward – the organization’s constitution must require it to distribute its assets “to any similar public benefit organization which has been approved in terms of this section.” Although the term “similar public benefit organization” will need to be interpreted by courts overseeing dissolutions, this provision seems easy to apply.
The rules for ordinary distributions are more complicated, perhaps because the determination of what is a distribution of profits and what is not is sometimes difficult to discern. The bill states that the organization must be “prohibited from distributing any of its funds to any person (otherwise than in the course of undertaking any public benefit activity).” In addition, the organization must be “required to use its funds solely for the object for which it has been established” or invest its money in accordance with the investment rules described in the next section. Aside from investments, this rule thus sets up both a negative and an affirmative test for each organization.
The negative formulation is somewhat problematic, in large part because it is so broad (the “to any person” language means that it applies to ordinary employees as well as to persons in a position of power). It requires an understanding of what a “distribution of any of its funds” is, within the meaning of the act. Is a payment of salary a distribution, or a reimbursement of expenses? In the ordinary course these would probably not be “distributions,” but questions arise when one goes further afield – for example, what about furnishing a CEO with a car and driver or paying for travel expenses to attend meetings outside South Africa? How re the lines supposed to be drawn It might be better and clearer to specify that payment of salaries and ordinary expense reimbursements are not considered to be distributions. This discussion make obvious the difficulties involved in formulating the negative aspect of the nondistribution constraint.
The affirmative test in the proposed law may also create problems as it is stated, again because of its potential breadth. Being required to use funds solely for the organization’s object would mean that no money could be spent on the small amount of income-generating activities that are allowed by the law, and that does not seem to make sense. It also would mean that no money could be spent in developing new activities in some instances (for example, an organization with a narrowly drafted object to combat one disease could not spend any money to transform itself into an organization that works to combat a different disease). All in all, there seems to be no perfect solution to the drafting difficulties mentioned here, but another round of discussions on this matter might be warranted before the bill becomes law.
3. Investment restrictions. The proposed legislation sets out certain investment restrictions for funds of PBOs which may or may not be useful guidelines, depending on how strictly they are applied. Funds are permitted to be invested
- with a financial institution;
- in securities listed on a stock exchange (which presumably includes overseas exhanges); or
- in “other prudent investments in financial instruments and assets.”
With respect to the third category of investments the Commissioner of Revenue is to make a determination of prudence, in consultation with the Financial Services Board and the Director of Non-Profit Organizations. The interpretation of these restrictions will be important, because diversity is the hall-mark of prudent investment, and that seems to be the over-riding standard to be applied. Not permitting investment in real estate would probably a mistake, particularly for large, well-financed PBOs.
Another issue is the tie-in between these rules and the restrictions on business activities of PBOs. Will it be possible for a Section 21 company or a charitable trust to have significant holdings in the stock of a business company, even if that company is not listed on a stock exchange? That seems unclear under the law as drafted. While the provision specifically exempts investments acquired by donation, bequest, or inheritance and would thus take care of most of the interpretive problems that might arise, there may be instances in which a Section 21 company or charitable trust may wish to acquire an investment stake in an ongoing business that is larger than a simple portfolio holding. Presumably that is alright, as long as the investment meets that “prudent investment” test, though the proposed legislation might be clearer on this point.
4. Restrictions on business activities. The proposed legislation take a very conservative approach to business activities by PBOs, which reflects a trend in the United Kingdom, where charities are not permitted to engage in trade, at least directly. Under the proposed new tax rules in South Africa, a PBO is prohibited from engaging in “any business undertaking or trading activity” unless that activity produces only a small percentage of the PBO’s income AND unless it fits a well-defined “relatedness” test or meets other tests.
- The minimum amount of income test. The amount of income from the business or trading activity may not exceed the greater of 15 percent of the organization’s gross receipts or R25,000.
- The “relatedness” test. The business or trading activity or undertaking must be
- integral and related to the sole object of the PBO and
- carried out an conducted in a manner directed to cost recovery and “which would not result in unfair competition in relation to taxable entities.”
- If the activity or undertaking does not meet the relatedness test, it must be of an occasional nature and be undertaken with voluntary assistance.
- Alternatively, the undertaking or activity may be determined by the Minister to be appropriate (and in making that determination the Minister must take into account , the “scope and benevolent nature of the activity or undertaking;” the connection to the organization’s purpose, the profitability of the undertaking, and “the level of economic distortion that may be caused by the tax exempt status” of the PBO).
Looking first at the “relatedness test,” the proposed legislation uses a difficult formulation – what does it mean to “result in unfair competition in relation to taxable entities?” Suppose, for example, that a university store sells computers to its students and faculty members at deep discounts off the prices at which they can buy the computers at retail outlets? Surely there is competition in that instance, but will the interpretation of the law be restricted to such situations only if there are sales to the general public? The formulation, though elaborate, does not make this clear. It is also unclear how the Minister is to determine the level of economic distortion, as required in the last quoted phrase.
More generally, the restrictions simply forbid direct economic activity of a business nature by PBOs, rather than taxing it if it is greater than a specified minimum. The complexity of the rules will undoubtedly give rise to careful tax planning by PBOs, and that planning is likely to center around the need to put unrelated business activities or undertakings into subsidiaries.
5. Tax benefits for donations to PBOs. This is an area in which the proposed legislation could use significant improvement. The previous tax regime only permitted deductible contributions to be made to certain kinds of educational institutions or funds. The new rules will permit the Minister to decide which PBOs are going to be designated as recipients of deductible donations, and the Budget Review of the Minister of Finance has suggested that the following list will be approved:
- pre-primary schools that offer an approved educare programme;
- primary schools;
- organisations mainly involved in preventing HIV infection or providing care to those whose livelihoods have been impoverished by AIDS;
- childrens’ homes providing care to abandoned, abused or orphaned children; and
- organisations mainly involved in caring for destitute aged persons.
While this is a significant improvement over current law, it by no means goes as far as it should. Although granting tax deductions does decrease revenues, the advantage of allowing deductions for donations to a wide range of organizations engaged in social and economic development is clear – such donations bring tremendous private resources to bear on significant problems facing ordinary people.
On a more positive note, the proposed legislation would increase the limitation percentage from 2 percent to 5 percent and make the deduction available to business entities along with individuals. The new law will also specify new rules for issuing receipts for donations, which simplify and clarify the situation for PBO recipients of donations.
Conclusion. The proposals discussed in this paper are ambitious and will result in significant change in the legislative landscape for PBOs in South Africa. Exactly what the final law will look like remains to be seen. But it is sure to create a better tax framework for PBOs in South Africa when it comes into effect.
Notes The formulation “any activity which is of a philanthropic and benevolent nature, having regard to the needs, interests, and well-being of the general public for the purposes of this section” is cumbersome and unclear. The terms philanthropic and benevolent tend to mean the same thing, while the clause “for purposes of this section” seems to be misplaced.  The most recent formulation of this the ICNL has been working on is in the “Model Law for Public Benefit Organizations in Central and Eastern Europe.” There the law would require :
16.1 No assets, net earnings, or profits of a PBO shall be distributed as such, directly or indirectly to any person, including any founder, officer, member of the governing body or employee of the PBO.
16.2 No member of the governing body shall receive compensation for service on the governing body. However, members of the governing body may receive reimbursement of reasonable expenses as well as compensation for work performed in another capacity for the organization.
This formulation also has problems, and it is simply offered for the purpose of comparison. Trading subsidiaries are normally used to get around this rule.
Further discussion of the NGO Policy document has been delayed until after the expected upcoming election, when it will be presented to the new Parliament. A meeting was held in late May to discuss the process for moving forward with the legislative drafting, and it was agreed among NGOs, donors, and other interested parties that the World Bank should sponsor the process as it moves forward.
Plans are underway in Uganda to formulate an NGO policy, according to the United Nations Development Programme (UNDP) Resident Representative in an announcement made at a workshop held at Hotel Africana on May 29. The workshop was organized to discuss UNDP’s interaction with NGOs. UNDP is presently discussing with government key areas for the next Country Cooperation Framework (CCF), which is scheduled to begin in 2001. UNDP’s future support in Uganda is likely to be directed towards poverty monitoring, governance, sustainable development, and advocacy for poverty eradication.