The International Journal
of Not-for-Profit Law

Volume 2, Issue 1, May 1999

What is “Public Benefit” Under Common Law and Civil Law Approaches?

How Does The Common Law Assess Public Benefit In Order To Define A Charity?

30 April 1999

Determination of charitable status depends solely upon the purposes to be pursued, not the legal structure that the organisation is to adopt.[1]

Upon an individual organisation’s request to be recognised as charitable, the Charity Commission, acting on the same basis as the courts, works within and interprets the legal rules that determine whether an organisation is charitable. These are mainly laid down in decisions of the courts on particular cases rather than set out in Acts of Parliament. There may not always appear to be any direct court precedent. The Charity Commission then must decide whether solutions to problems thrown up by changing social needs are legally charitable in the same sense as those already accepted as charitable. The Charity Commission must also consider whether the courts would or would not now follow a decision made many years ago and in different circumstances. As is the increasing practice of the courts, where appropriate, the Charity Commission will consider the underlying principles raised by a particular application for registration in order to provide guidance for future cases.

An organisation refused registration can appeal to the High Court,[2] but this option is rarely taken due to the expense of court proceedings. Once an organisation is recognised as having charitable status, all the benefits of that status are afforded – there are no grades of charitable status. Because charities receive certain tax and other advantages that have implications for the Exchequer, the Inland Revenue may make representations to the Charity Commission and may appeal to the High Court against the Commission’s decision to register an organisation as a charity.

Although the Inland Revenue is not usually the decision making body on charitable status, it should not be forgotten that taxation will be an issue to consider when determining charitable status. This is not usually overtly stated. A rare exception is the comment of Lord Cross in the House of Lords in Dingle v Turner[3]:

In answering the question whether any given trust is a charitable trust the courts – as I see it – cannot avoid having regard to the fiscal privileges accorded to charities.

Lord Cross went onto describe previous decisions of the English courts as ‘pretty obviously influenced by the consideration that if such trusts as were there in question were held valid they would enjoy an undeserved fiscal immunity’.

The courts develop charity law to keep the law’s view of what is charitable reasonably in line with modern social needs and conditions. Thus the legal concept of charity alters, and its evolution is influenced by ideas about social values. Court decisions reflect ordinary life, taking into account generally accepted views on the nature and usefulness of what an organisation aims to achieve and its benefit to the public. So, while public opinion cannot determine what is or is not charitable, it is an important factor to be taken into account in the shaping of the legal understanding of charity.

For an organisation to be a charity it must have aims which are exclusively charitable and must be set up for the benefit of the public.

In order to determine which purposes are charitable the law uses a process of precedent and analogy. The courts have decided that those purposes are charitable which fall within the spirit of the preamble to the Statute of Charitable Uses 1601. The preamble contains a list of purposes which were regarded as charitable in Elizabethan times.

The courts added to the list of purposes which were accepted as charitable over the years and in 1891, Lord Macnaghten in the case of Income Tax Special Purpose Commissioners v Pemsel[4]classified charitable purposes under four heads:

• relief of poverty;
• advancement of education;
• advancement of religion; and,
• other purposes beneficial to the community.

The classification has been used since as a matter of convenience but it is not a definition.

Although the courts still use the preamble as a touchstone and refer to the Pemsel classification, they have long recognised that what is accepted as a charitable purpose must change to reflect current social conditions. So a purpose will be charitable not only if it is within the list in the preamble, but also if it is analogous to any purpose either within it or since held to be charitable. Nowadays, many charities are set up for purposes that are not mentioned in the preamble.

In this way, charitable purposes have been extended and developed, by decisions of the courts and of the Charity Commission, so that the development of the law has reflected changes in social conditions and attitudes.

A purpose will be accepted by the courts and the Commission as charitable only if it is for the public benefit, which I will now focus on.

Public benefit is the main justification for the legal and fiscal concessions granted to charities.

There are three elements to the public benefit criterion which I want to underline:

• the organisation must be capable of causing a clear benefit to the public;
• those eligible to receive benefits must (except in the case of organisations set up exclusively to relieve financial hardship) comprise a large enough group to be considered as the public or a sufficient section of the community and no personal or private relationships must be used to limit those who may benefit;
• any private benefits to individuals must be incidental and must not outweigh the benefit to the public.

1. Proving Benefit

So far as the first requirement is concerned, proving benefit is a question to be determined by the court or the Charity Commission, not by the founder of the alleged charity or the testator.[5]

The test for the measure of public benefit required varies with each of the four heads of charity.

Where the purpose appears to fall within one of the first three heads of charity in Pemsel’s case – that is relief of poverty, advancement of education or advancement of religion – the law, subject to evidence to the contrary, assumes that there is public benefit.

For example, it is assumed that a gift for the advancement of religion is prima facie beneficial to the public. In general, no distinction is made between one religion and another. There is a general assumption that the advancement of religion is for the public benefit. For the advancement of religion to be charitable, a religion (with a few exceptions), has to:

• be founded on a belief and reverence for a god or gods;
• promote spiritual teaching and the dissemination of its doctrines; and
• promote itself in religious rites, observances and services.

The advancement of religion can include the provision and upkeep of places of worship, paying ministers or priests, and holding services.

The courts will not consider the merits of the beliefs which are to be promoted, provided that they have a religious tendency and do not undermine morality or religion. In Re Watson (decd),[6] for example, Plowman J upheld a gift for the propagation of ‘the truth as given in the Holy Bible’ by the distribution of religious works books and pamphlets, written by the testatrix’s husband, which were regarded by experts as of no intrinsic worth and unlikely to extend the Christian religion, although displaying a religious tendency.

However, there are circumstances in which the advancement of religion is not charitable. This is where public benefit is clearly lacking. Examples of this include:

• organisations where the benefit is wholly private (such as an entirely enclosed religious order where the activities consist only of private prayer); and
• where an organisation is set up to promote the beliefs of a particular religion which undermine the accepted foundations of religion and morality, or are otherwise contrary to the public interest.

Where, however, the claim of charity is made under the fourth head – other purposes beneficial to the community – it is necessary to demonstrate affirmatively public benefit.

It is under the fourth head that most of the issues concerned with assessing benefit have arisen. Under this head of charity, benefit to the community is not assumed and must be proved.

The courts have clearly indicated that they will not be rigidly bound by precedent and that a particular purpose may cease to be charitable as ideas about social values change. This has two implications:

• new purposes not previously considered charitable may be held to be so;
• purposes previously regarded as charitable may no longer be held to be charitable.

Thus, in National Anti-Vivisection Society v IRC,[7] Lord Wright said:

…trusts [providing particular remedies thought to relieve the distress caused by advanced age, sickness, disability or poverty] may, as economic ideas and conditions and ideas of social service change, cease to be regarded as being for the benefit of the community, and trusts for the advancement of learning or education may fail to secure a place as charities, if it is seen that the learning or education is not of public value.

The status of the predecessor of the National Anti-Vivisection Society itself had been considered by the High Court in 1895. Its main object was the abolition of the practice of vivisection (laboratory experiments on living animals). The court accepted that the intention was to benefit the community and that it was a charity. That decision remained undisturbed for the next 50 years. However, when the House of Lords considered the matter afresh in 1948 they decided that, even though abolishing vivisection would help laboratory animals and thus elevate humanity, such benefit was far outweighed by the damage caused to humans by the loss to medical science and research (and the consequent detriment to public health). A purpose held charitable by the court in one age was later judicially recognised as not actually beneficial to the public and not charitable.

The Charity Commission has the same powers as the court when determining whether an organisation has charitable status and the same powers to take into account changing social circumstances – whether to recognise a purpose as charitable for the first time or to recognise that a purpose has ceased to be charitable. It interprets and applies the law as to charitable status in accordance with the principles laid down by the courts. The Commission, faced with conflicting approaches by the courts, takes a constructive approach in adapting the concept of charity to meeting the constantly evolving needs of society, remembering the need to find a sufficiently close analogy for any new charitable purpose.

An example of the Charity Commission using its powers so as to recognise a purpose as charitable for the first time is:

Good Community Relations

Before 1983 it was considered by some that the promotion of racial harmony could not be a charitable purpose. The Court of Appeal in Re Strakosch[8] had held both that the appeasement of racial feelings between different ethnic groups in a community was a political purpose and also that such a purpose was too vague and might include very wide objects, some which were plainly not charitable. In 1983, the Charity Commission reconsidered the position in the context of contemporary Britain and in the light of changed social circumstances. It decided that organisations opposing racial discrimination and promoting good community relations could be registered as charities. Parliament, in race relations legislation, had recognised their public benefit. There were also analogies to other purposes which had been held by the courts to be charitable (particularly charities for the preservation of public order, and for mental and moral improvement, and for the promotion of equality of women with men).

An example of the Charity Commission using its powers so as to recognise that a purpose has ceased to be charitable is:

Rifle and Pistol Clubs

Trusts for promoting the efficiency of the armed forces and thus the defence of the realm are charitable. In 1892, the High Court determined that the teaching of Englishmen to shoot with particular weapons which are used in war for the destruction of their enemies and protection of themselves was also charitable.[9] In apparent reliance on that decision, the Charity Commission had registered a number of civilian rifle and pistol clubs. The Charity Commission considered the matter generally in 1993 and decided that this decision did not support the charitable status of civilian rifle and pistol clubs at the end of the 20th century and that the clubs concerned had been erroneously registered. The 1892 decision was understandable in its social and historical context (the immediate aftermath of the First Boer War) but had no modern application (and none beyond its own circumstances). The charitable purpose of promoting the security of the nation and defence of the realm could not be carried out in the modern day by providing a restricted number of civilian members of a club with instruction and practice in shooting. In the aftermath of the Falklands and Gulf conflicts, it was seen that the skills required of modern uniformed personnel were quite different and clubs (whose principal concern was the benefit of members through recreational and sporting shooting) were in no sense a reserve for the armed forces. Consequently, the Charity Commission has removed most of the clubs from the register following lengthy consultation with them and their national representative bodies.

2. Public Benefit

A charity must confer a benefit on the public as a whole or on a sufficient section of the public.

In general, a purpose is not charitable if it is mainly for the benefit of a named person or specific individuals. It will also not be charitable if the people who will benefit from it are defined by a personal or contractual relationship with each other. For example, if the beneficiaries are related or connected to the person who is setting up the charity, or where they are defined by common employment or by membership of a non-charitable body, for example, members of a professional institute.

An exception to this general rule exists in the case of the relief of financial hardship, where the beneficiaries can come from a more restricted group, such as people having the same employer.

The extent of public benefit may vary between different types of charity.

It may be that the people living in a particular area belong predominantly to a particular racial, ethnic, religious or other group, and this group will inevitably be the main beneficiary of a charity’s activities. This is unobjectionable in terms of charity law as long as the benefits are not additionally restricted solely to members of that group. This would constitute a ‘class within a class’, and is too small a beneficial class.

3. Private Benefit

Charities, other than those for the relief of poverty, cannot confer more than incidental private benefit.

The conferral of private benefits on individuals does not disqualify an organisation from charitable status provided that such benefits are truly incidental to the attainment of a charitable object. Whether any private benefits arise only as a necessary means of achieving an overall charitable purpose must be determined in each case.

The conflict between public and private benefit is often at the heart of many decisions concerning charitable status.

This was made clear in the recent case of IRC v Oldham Training and Enterprise Council.[10] One of the objects of Oldham TEC was the provision of support services and advice to new businesses. The court decided that this object allowed the organisation to promote the private interests of individuals regardless of whether there would be any consequential benefits to the wider community. Consequently, the benefit to the community was too remote from this activity to be charitable.

In 1999, following public consultation, the Charity Commission recognised the promotion of urban and rural regeneration for public benefit in areas of social and economic deprivation as a charitable purpose in its own right. Charitable regeneration organisations can achieve this by the maintenance or improvement of the physical, social and economic infrastructure and by assisting people who are at a disadvantage because of their social and economic circumstances.

Most of the tangible benefits of urban or rural regeneration would normally seem to go, in the first place, to individuals and individual businesses rather than the wider public. If an organisation is to be a charity its purposes and activities must therefore be restricted so that any private benefits arise only as a necessary means of achieving the overall charitable purpose and are incidental to it. It would not be acceptable if the private benefits were an end in themselves. The status of the organisation will therefore depend on its poise in this respect. This will have to be determined in each particular case.

An organisation applying for registration will therefore have to demonstrate that its activities will not result in an unacceptable level of private benefit. For example, in an area which is ‘deprived’ largely because of its poor housing and high crime rate, but which has a reasonably low level of unemployment, activities aimed at reducing further the level of unemployment – such as retraining – will have only a minor effect on alleviating the deprivation of the area. The public benefit is therefore more likely to be outweighed by the element of ‘private’ benefit which will accrue to employers.

On the other hand, in an area of high unemployment, such activities are likely to have a considerable effect on the regeneration of the area, and the public benefit is more likely to outweigh any private benefit accruing to employers. Organisations applying for registration must develop their own criteria for measuring the public and private benefit arising from their activities.

This is a brief introduction to the issues to be considered in assessing public benefit in order to define a charity within the Common Law.

Notes

[1] The most typical legal structures adopted by charities are: company; trust; and, unincorporated association.

[2] Charities Act 1993, s.4.

[3] [1972] AC 601 at 624.

[4] [1891] AC 531.

[5] See, for example, Re Pinion [1965] Ch 85, 107 where, in the opinion of the court, having taken expert advice concerning the educational value of an ‘art collection,’ there was no useful purpose in ‘foisting on the public this mass of junk.’

[6] [1973] 3 All ER 678 at 688.

[7] [1948] AC 31.

[8] [1949] 1 Ch 529.

[9] Re Stephens (1892) 8 TLR 792.

[10] [1996] STC 1218.

Who Decides What Organizations Qualify?

Public Benefit Status and NGOs

By Ulrich Drobnig
Hamburg

Most East European laws (with the exception of Estonia) seem to focus on only one issue: An NGO must, by virtue of statutory definition, have public-benefit status. If it has not, it is not an NGO. This monistic approach is especially pronounced for foundations but it seems also to be advocated for associations.

This approach, with its focus on public-benefit status, generally is not shared in Western Europe. On the basis of a rough survey of seven West European legal systems I can say that there the legal solutions are much more differentiated. At least three distinctions are being made.

1. The first issue is whether an organization is of a non-profit character. Access to the organizational forms of association or foundation is granted only if this is affirmed. The determination is usually made by the registration authority, which may be a court or an administrative authority.
2. The second issue is whether an organization is public benefit in character. This issue is decided together with the first issue in the Francophone countries of West Europe because these countries, like the majority of East European countries, admit only public benefit foundations.In other countries, where foundations do not exist as a special type of organization, public benefit status is conferred independently of the first step. The prominent example is England, followed by Scotland and Ireland. In these countries, ordinary forms of organization (such as an association or a commercial company) or even a proprietary arrangement such as a trust, may serve as vehicles for non-profit activities. In England, public benefit status is conferred upon these vehicles by registration as a charity with the Charities Commission, an independent administrative authority.In a third group of countries, public-benefit status as such is unknown. This is so especially in several Central European countries, like Germany and the Netherlands.
3. The third issue is the granting of tax benefits. In those countries which recognize a public benefit status (cf. supra 2), tax benefits are usually implied by public benefit status.

By contrast, in those countries which do not recognize a special public benefit status, tax benefits are awarded in a separate step. They are awarded on functional grounds, not as an incidence of status. The substantive criteria, though, may be very close to those for public-benefit status. However, since only a matter of taxation is involved, the tax authorities claim jurisdiction to award the privilege or to refuse it.

The aforementioned three issues need not be solved uniformly for all types of NGOs. Rather, a distinction is often made in dealing with associations on the one hand and foundations on the other. For good reason, the control of associations is usually much closer than that of foundations. The latter, as memberless organizations, are more vulnerable both to misconceptions of ill- or unadvised founders and to mismanagement during their existence. Administrative authorities or neutral advisors, such as Civil Law notaries may therefore be more necessary for the creation and supervision of foundations than for the creation and supervision of associations; control of the latter is even prohibited by some constitutions.

The variations which this short comparative survey has revealed choices from which legislators and reformers in Eastern Europe may wish to select those solutions which are most adequate for the specific circumstances of their respective countries.

Public Benefit Status and NGOs  

By Michael Boyadjiev
Bulgaria

Public benefit status should be given only to those organisations that want it. This status means more control from the state but the state control should depend on the level of benefits an organisation gets. The greater the benefits, the greater the supervision and vice versa. Private donations are not the result of privileges granted by the state and therefore there should not be the same level of state supervision regarding donations, if any at all.

Public benefit status entitles a non-profit organisation to some benefits from the state. Most important among these are tax benefits, state contracts, use of public funds, as well as other advantages such as the enjoyment of a higher public trust in the operation of the organisation, permissions to engage in certain types of fund-raising (e.g.- lotteries), etc. As the state is the entity that gives the benefits, it is the one who sets the requirements that an organisation must fulfill in order to qualify for public benefit status. There are, however, some hidden dangers in the granting of public benefit status, such as possible corruption (when deciding which organisation is of public benefit), too much control of the state over the organisation, and losing the public trust by virtue of the independence of the organisation from the state. In order to avoid these problems, it is very important who makes the decision for granting public benefit status.

There are several different options as to the decision-making body. Each of them has its own advantages and disadvantages. The most frequently used decision-making organs are:

• a “line” ministry, which is the ministry responsible for the subject matter of the proposed activities of the NGO;
• a single ministry with registration functions;
• the courts;
• the tax authorities;
• a special, independent commission to deal with granting public benefit status.

It is important to remember that any of these organs can work in positive or negative ways, depending on how they are implemented in practice. There are several important points on which we can compare the different options. First of all comes the issue of impartiality and fairness. If the decision-making process is left in the hands of any of the organs of state administration (such as a ministry), it will most probably be affected by political considerations. The two most impartial institutions will be the court and the independent commission. However, there are some fears that an especially designed commission would be vulnerable to corruption. There is also the fear that because the members of the commission will be appointed by different powers, they will start fighting with each other and the commission will become an arena of political conflict instead of decision-making. An example to the contrary is the work of the Charity Commission of England and Wales.

The work of the decision-making organ should also be transparent. This is most true for the way an independent commission or the courts work. Ministerial decisions are usually not very clear.

Comparing which organ is more inclined to give public benefit status to an organisation we can see that the tax authorities are usually at the negative extreme (not willing to give such a status). They are quite strict when it comes to gathering the taxes and always prefer the case in which taxes would be more (meaning less tax-exempt organisations). A positive aspect of tax authorities is that their decision is final; their grant of public benefit status will carry with it tax-exempt status as well. Where another agency is the decision-maker, it is possible for the tax authorities to make a second determination of who is entitled to tax-exempt status. This is not good practice. The two decisions should be taken together or at least the requirements should be the same for both institutions. Another positive feature of tax authorities is that they are able to supervise the activities of the organisation and evaluate whether they correspond to the stated purposes of the organisation’s statute. The tax authorities are specialised in the investigation of forms of fraud such as tax fraud. The same is true to a lesser degree for a “line” ministry. The courts and the independent commission are not as well equipped to carry out supervision of public benefit organisations.

Another important question concerns the speed of the decision-making process. It is natural that the fastest decisions will be taken by the independent commission as this is its main activity. On the other hand, the court system is overloaded with work, and delay has become a normal part of its operation. A common argument against the courts as a decision-making organ, even before giving them this new function concerning public benefit organisations, is that they have problems coping with their workload.

As with any other state agency, the decision-making organ should work professionally and be staffed with experts in the field of NGOs. This is not very likely in the case of state administration or the courts. As there are be no specialised courts for these types of decisions, judges will not be especially familiar with important details and insights into the needs of and benefit to the public. Actually, the decision to be taken is not exactly in the domain of the courts as it is not a question of legal norms but rather a value determination – what is of benefit to the public and what is not. Professionalism is acquired when you deal in depth with an area, which cannot happen in the court or a ministry unless especially created for the purpose. Closely linked to the question of competence and professionalism is also the question of consistency. It is possible that two organisations with similar purposes receive different treatment – one is granted the public benefit status and the other is not. To avoid this, all decisions must be consistent. In relation to the court, there is a difference in this regard between common law and civil law countries. In the common law, the precedents have binding force – stare decisis. Once a case is decided in a certain way, this decision is followed in subsequent cases. In civil law countries there is no system of precedent so there is quite often no uniformity in decision-making. This is what has happened in Hungary where the court has taken different decisions on the same issue. The same result can occur if the decision is taken by a “line” ministry. Perhaps the Ministry of Culture is more inclined to give public benefit status than the Ministry of Education. Such a situation will also lead to a lack of uniformity. A good solution for both of these problems – professionalism and consistency, is the creation of an independent commission, whose only work is to deal with the question of decision-making connected with public benefit status. Such a commission will have professionalism as a result of its specialised nature. Because the commission will be the only organ making this determination, one may expect uniformity in its decisions.

Last but not least in importance comes the appealability of the decision. Any refusal for granting public benefit status should be subject to appeal.

As already mentioned, any of these models can work or fail completely, depending on the social circumstances. The Charity Commission works in England but maybe would not be a good solution in another country. Similar is the situation with the courts – a court may be the best place in theory for the determination to be made, but in practice the slowness of the judicial system can render the decision completely unworkable. However, by comparing the above-noted criteria we can see that in the majority of the cases the best place for making the public benefit determination is the independent specialised organ.

In order for the decisions to be most impartial and professional, a decision-making organ should consider the opinion of NGO representatives, tax authorities, the different political powers (or organs), as well as several independent experts.

A frequently discussed problem is whether registration should be a one- or two-stage procedure. In a one-stage procedure, public benefit status is given at the same time registration is made (when legal personality is obtained). A two-stage procedure requires an additional step to acquire public benefit status. There are some advantages of the one-stage procedure which need to be mentioned. A single application procedure may save time and money. Also the burden of proof as to whether an organisation qualifies for public benefit status is left to the determination-making organ. A disadvantage is that there is a large possibility for abuse. There is also a limitation for organisations that decide to change their purposes and become of public benefit. They must create a new legal entity, which may obtain this status at the moment of registration (and at the same time terminate the pre-existing legal entity which is already an unnecessary complication).

A two-stage procedure allows for a very quick registration at the first step, as there is no public benefit determination to be made. It also does not create the limitation discussed above. There is more confidence and less possibility for misuse in this case. However, as there are two application procedures, it may take more money and time. The first advantage here is that the state and society in general have more warranties against any abuse with the public money collected by an organisation which enjoys public benefit status. The second is the impossibility of transferring that money for mutual benefit. The tax authority’s control shall be more directly implemented and any reorganisation of a public benefit organisation will be very closely monitored.

Whatever the procedure for acquiring public benefit status, there must be some criteria to be followed when making the decision. One basic idea must be taken into consideration – there should be no requirement for the organisation to have carried public benefit activities before being granted the public benefit status. Every decision-making organ must realise the fact that when organisations are registered as public benefit, only their purposes are tested. Their activities are tested only with the follow-up supervision of the registration agency. What is usually required in the public benefit determination procedure is that the organisation fulfils as its principal purpose one of the public benefit purposes stated in the law governing public benefit organisations. A catch-all provision for purposes that are not included in the law but may be seen as public benefit ones should also be included in the law.

The second basic principle is that all the legal requirements in accordance with the granting of public benefit status should be strictly and explicitly described in the law.

Public benefit status is a way by which the state can give impetus to organisations to provide important social services. Instead of providing those services by itself, the state shares the expenses and responsibility with the third sector.

What Level of Accountability/Regulation is Appropriate?

Plenary No. 3: What Level of Accountability/Regulation is Appropriate for Public Benefit Organizations?

By Nilda Bullain and Petr Pajas

May 4, 1999, ICNL/CEU Center

Summary of the Panel Presentation

Suggested issues and some topics for discussion:

1. Why is There a Need for Regulations Regarding the Accountability and Transparency of Public Benefit NGOs?

On the subjective level

• NGOs claim to exist and operate in the public interest and in many cases serve for the public benefit.
• NGOs need the support of donors and sponsors from the general public, therefore they must also gain the general public’s trust.

On the practical level

• NGOs would like to obtain tax benefits like tax exempt status or a reduction of tax and other fiscal obligations.
• NGOs should meet the stakeholders’ interest. Therefore, NGOs must be transparent and accountable:
• to the government (in the case of receiving any subsidies, governmental grants or donations),
• to private donors, and
• to their own clients.

Therefore, there is a need to balance the required or expected benefits against some measure of responsibility, manifested by transparency of operations and accountability of all economic activities and decision-making with regard to activities done or claimed to be done in the public interest.

2. What Do We Mean by Accountability and Transparency?

• What information may or should be provided or disclosed?
• What is the level of reporting that is acceptable or required from an NGO?
• Is there anything that can or should be prescribed by law?
• Should there be any variations in the required information depending on the size or type of the NGO?

2.1. What types of information should be disclosed?

The disclosed documents should give a person sufficient information to make an assessment of the organization’s achievements in light of the amount of money spent by the organization.

Relevant information includes:

Financial information

• Financial statements (including balance sheets) prepared by an independent, licensed auditor or an internal supervisory body.
• An accounting of the use of assets obtained from public sources and claimed to be used for public benefit or in the public interest.
• Functional expenditure reports.

Professional information

• A report (serving also for improving public relations) on activities made in the public interest or detailing the use of public assets.
• Any evidence of performance contracts which are deemed important and of general public interest.

 Personal information

• Regarding persons responsible for the NGO (founders, board of directors or executive committee members, chief executive officers) The purpose of this information is mostly to provide necessary contacts and avoid perceived conflict of interest claims.2.2. What should be the extent of disclosure?

The information disclosed should be:

In such a detail as:

• to illustrate the trustworthiness of the NGO,
• to meet the NGO’s own interest in informing the public,
• to provide the information required or expected from donors, and
• to show an open-minded approach on the part of the NGO, even when it is not fully successful in all areas of operations.

However, the information should not:

• contain intimate personal or financial data;
• provide valuable know-how to potential competitors;
• harm the interests of the NGO or its members;
• harm the interests of third persons; or
• provide data in excess of established best practice in the country, unless the NGO wants to set an example of reporting or to stimulate better practice.

2.3. How should the information be differentiated in levels?

The level of detail required from the organizations shall be differentiated by the:

• legal form, status or type of the NGO;
• level of income and expenditures of the NGO; and
• level of public funding available or provided to the NGO.

Of course, the level of detail should always depend on:

• the importance of the information to the general public or the recipient of it;
• its value and relative weight in the overall sum of activities or assets reported;
• the need for, or establishment of, public relations or an image; and
• the proportion of publicly- oriented activities in relation to activities which may be of purely mutual interest and which may not be reported at all.

3. What Are the Possible Roles and Institutional Options of a Regulatory Body?

3.1. What possible roles should be given to a regulatory body?

In general, there are four main roles:

1. To exercise supervision of NGOs by

• ensuring accountability and transparency by requiring certain reports;
• supervising the activities of NGOs with respect to the requirements of the law and commonly accepted ethical rules.

2. To decide upon or to provide recommendations concerning public benefit status.
3. To inform both the NGOs and the general public

• of the certified registration of public benefit organizations;
• of activities recognized or welcomed as public benefit by the state authorities or according to international agreements or conventions; and
• of the data needed for the interrelation of NGOs with third persons (e.g.- who is entitled to represent the NGO and how may documents be authorized, etc.).

4. To provide certain services, such as

• setting and monitoring certain quality standards;
• providing legal assistance;
• providing a forum for discussion with the government or regional/local authorities;
• calling for tenders in general interest;
• calling for meetings of NGOs; and
• disseminating the information by initiating and/or co-organizing seminars and conferences.

3.2. The institutional options

In general, the organization of the regulatory body will depend on its role as stipulated by law or as required by NGOs.

The regulatory body may be set up as:

• the revenue (tax collecting) offices (which is the usual case with respect to revenue reporting and tax exempt applications);
• an agency or branch of the national government or some of its ministries (which exists already in some countries- see e.g., the Charity Commission of the England and Wales);
• some other national or regional governmental agency with special competence provided/specified by the law;
• an independent commission with members of high public trust (elected according to certain rules to represent certain groups of NGOs or fields of operation or appointed by one or more authorities respected by both the government and the NGOs (e.g., the commission proposed in the Republic of Georgia);
• some democratically elected body of NGOs;
• the court (usually only upon claims of misuse reported to it by some interested party);
• the general public through annual reports published by the NGO (e.g., as conceived under present laws in the Czech Republic).

A regulatory body will not be established if it does not suit both the government and the NGOs, or if the existence of a regulatory body would contradict the law or be unacceptable on some moral basis.

4. What Are the Qualities Required of Any Authority which Supervises the Compliance of PBOs with Criteria Set for the PBO Status?

In addition to general requirements like trustworthiness, transparency and accountability in the use of public funds and other similar “moral” qualities, there are certain requirements which we feel may be expressed as follows:

• In general, the members, important managerial staff persons or any other important decision-making persons or bodies should be made known to the general public.
• The body must be independent from any direct influence of political forces, to the extent possible.
• The body must have procedural requirement ensuring, as much as possible, its non-partisan decision-making.
• The staff and decision-makers of the body must have professional knowledge with regard to NGOs activities and the legal environment in which the NGOs operate.
• The authority should be a supportive and advisory body concerned with the growth of stability and self-sufficiency of the NGOs and civil society as a whole.
• It should be well informed, i.e. equipped with a well structured and permanently updated database and have access to relevant data from the governments and NGOs.
• It should have sufficient authority within the governmental structures to serve both its supervision and supportive roles with respect to the NGOs in their relations to the government.

5. Which Tools are Available for Regulatory Purposes?

Among the many possible tools, we think the most important are:

• regular revenue reports for taxation purposes (as regulated by tax or revenue laws);
• tax benefit application forms submitted voluntarily by NGOs;
• internal auditing by an individual or some elected body (this is usually cheaper then external auditing but may not be considered independent enough);
• external independent auditing by a licensed accounting/auditing officer (which is usually very expensive and should be required only for very large NGOs which use public assets or property and when the annual sum of incomes and expenditures is in excess of certain well defined value);
• obligatory or facultative annual activity reporting with financial balance sheets;
• on site supervision, at any time or upon notice, during hours specified by authorized officers (under some well defined conditions minimizing the level of harm the supervision may have on the current activities of the NGO with respect to third parties);
• special reports to a commission or agency on request or on a regular basis;
• annual reports filed at the registration office (an agency or a court) and made available for making extracts or copies available (for a reasonable cost) to anybody who proves legal interest;
•   reports addresses exclusively to contracting parties, donors or sponsors; and
• claims to the court on misuse of the assets or non-compliance with the laws.

6. May the General Public Effectively Supervise the Activities of PBOs Through Availability of Annual Reports and, if So, How May This Process beFfacilitated?

One of the aforementioned tools consists in allowing the general public to exercise the supervisory role upon the behavior of the NGOs with respect to the public benefit.

The use of this tool would make sense, if

• the general public is well aware of the importance of NGO activities and what those activities actually consist of;
• it is easy for an interested citizen to access and monitor the activity of NGOs;
• the information sources concerned are reliable and of the quality required;
• the market interests may not manipulate the access to information about NGO activities (which is unfortunately often the case of the news media, especially television and the central press in many countries);
• conflicts of interest are taken care of and there is a well defined balance between the supervisory role of the citizen and the benefit s/he may have or expects to have from the activity of the supervised NGO; and
• the citizens have a mechanism whereby they may express their satisfaction or dissatisfaction with the activities of certain NGOs (e.g. such as the Hungarians have when deciding on allocation of 1% of their personal income tax to certain NGOs).

7. The Practice in Hungary and the Czech Republic

7.1. The case of Hungary: The law on public benefit organizations (1997)

The law classifies NGOs as organizations of

• outstandingly public benefit;
• public benefit; and
• mutual benefit.

How the law deals with these categories of organizations as far as reporting is concerned may be illustrated by some excerpts from the law:

• 5b) Outstandingly public benefit organizations should bring to the public the most important data on their activities and finances through local or national media.
• 7 (2)(d): The founding document or internal bylaws should contain the [method of] publicity reporting.
• 19 (1-2): Together with the approval of the annual report the public benefit organization should make a Public Benefit Report, to be accepted by the highest decision-making body.
• 19(3) In addition to an accounting report and a short narrative summary of the public benefit activity, the Public Benefit Report should contain information regarding the:
  • use of public (budgetary) support;
  • use of own assets (i.e. fund balance);
  • use of earmarked support;
  • level of support from central bodies, governmental funds, local government, minority local government, association of local governments, social security, and their agencies thereof; and
  • value or amount of contributions to chief officers.

A person responsible for the submission of information on behalf of an organization should take into account the following loopholes, questions and problems:

• There is no specification of the “most important data” or of “publicity.”
• The law does not specify the obligation to submit the Public Benefit Report to any authority at any time nor there is any deadline for preparing the report.
• The emphasis placed on details of how the money was spent, while activities and achievements are hardly mentioned (i.e.- mechanical criteria prevails over substantial criteria).
• The requirement to publish details of contributions to chief officers can be in conflict with personal data protection.
• No proper differentiation according to levels is provided, (i.e., there are too many administrative obligations).
• As a result, the NGOs perceive these obligations as burdensome rather than as an opportunity in their own interest, which does not help in raising the awareness of the role of NGOs in society.

 7.2 The case of the Czech Republic

There are two laws which regulate public benefit organizations specifically:

1. The Act on Public Benefit Corporations (1995)
2. The Act on Foundations with Endowment and Funds without Endowment (1997)

The first of these laws defines the new legal form – the public benefit corporation – as a purely not-for-profit legal entity established by the Czech Republic or any natural or legal person for the purpose of providing commonly beneficial services to all of their users under equally accessible conditions. In fact, this legal form may be regarded as an operating foundation from the American point of view, or as a private version of the subsidiary or a budgetary organization depending on the point of view of the present legal situation in the country.

The second law defines private foundations serving exclusively for the public benefit as legal entities endowed by their founders with certain assets, which may not be sold or otherwise willfully diminished. In the pursuit of achieving its purpose, a foundation may use the income generated from its endowment, which is fully exempt from the corporate income tax when duly registered, and any other assets it may have.

The same law also defines funds which may not be endowed by the founders, but also must be established explicitly for public benefit purposes. With respect to economic activities, these funds have no freedom of action besides cultural, sportive, educational and social activities, which serve their purpose. On the contrary, an endowed foundation may use some of its assets to become shareholders in joint stock companies.

All three types of NGOs, which should operate only in the interest of the general public, have certain tax benefits which are common to any not-for-profit established legal body.

As far as reporting is concerned all these forms of NGOs have a general obligation to produce an annual report, which must be published not later then in June of the following year. In the case of the public benefit corporation the report must be made available to anybody. The same is valid for the foundations and funds, but in this case the report must be also submitted to the registering court, where it becomes a part of the register file, which is considered a public document.

The annual report of a public benefit corporation must include

1. a review of operations pursued in the calendar year with specification of the relation to the purpose of establishment of the Public Benefit Corporation;
2. an annual balance sheet of income and expenditures and the critical review of the basic data included therein;
3. a statement of the auditor to the annual balance sheet of incomes and expenditures, if an audit was made [which is required only when state property or donations from the state are used or when a rather high limit on incomes and expenditures was exceeded];
4. a review of money received and spent;
5. a review of income (revenue) structured by source;
6. the movements in, and the final balances of funds of the Public Benefit Corporation;
7. the movements and balances of assets and liabilities of the Public Benefit Corporation;
8. the total amount of costs structured by those spent for rendering the publicly beneficial services, for pursuing complementary operations and administration costs of the Public Benefit Corporation;
9. any changes, modifications and amendments of the Deed of Establishment and changes in the membership of the managerial bodies of the Public Benefit Corporation as occurred throughout the year;
10. other data as specified by the Board of Directors.

Similar regulations hold for the foundations and funds, where the report should include a list of any donations received and grants provided in excess to certain limit (about US$250).

At present, this is the only regulation besides the revenue reporting to the tax offices, which is the same as for any other legal entity. The NGOs with profit not exceeding a certain limit (about US$2,500) may even not report to the tax office, but may be still supervised by the office on a random inspection.

What (Tax and Other) Benefits are Available to Public Benefit Organizations?

Tax and Other Benefits for Public Benefit Organisations (PBOs)

By Paul Bater
International Bureau of Fiscal Documentation, Amsterdam, Netherlands

A. Non-tax Benefits

1. Access to Support from Central and Local Government

• Decided by:

1. central government
2. local government independently of central government
3. local government within limits determined by central government

2. Access to Funds from Foundations and Other Private Donors

• Decided by donor by reference to donor’s own criteria (which may be restricted by domestic or foreign laws).

3. Ability to Raise Funds from the Public

• Central or local government decides who can raise funds in this way
• Public decides which NGOs they wish to support

4. Access to Voluntary Labour

• Volunteers decide which NGOs they will help without payment

Many states use a wider definition of PBOs for the purposes of granting non‑tax benefits than they use for the purposes of granting tax benefits. Examples of this include:

• appeals for the victims of a natural disaster may raise funds for the private benefit of some individuals who are not poor;
• campaigning NGOs (such as Greenpeace) may be regarded as too political to receive tax benefits but may still be eligible to receive other benefits.

B. Differences between tax laws and other laws regulating NGOs

1. Countries with more than one legal jurisdiction usually have one national tax system for all jurisdictions.
2. Many countries impose taxes at both national and local levels, with different laws and benefits at each level
3. One country can have different criteria for granting tax privileges which vary according to each tax that it imposes.
4. Tax laws are increasingly influenced by international trends. For example, mobile funds can move from a state with higher taxes to a state with lower taxes, so some states are starting to rely more on taxes on immobile factors of production such as labor, real property and energy use.

C. Tax benefits and related issues

1. NGOs Typically Have 3 Main Sources of Funds:

• grants and subsidies from central and local government;
• private gifts (in cash or in kind) from individuals and companies; and
• self-generated income (mainly income from the sale of goods or services; some NGOs with large funds also have income from investments).

2. Direct Taxes on Income

• Most states do not tax grants and subsidies. This is achieved either by excluding them from the definition of income or by granting exemption from income tax.
• Similarly, most states do not tax NGOs on private gifts received, provided that the donor has not received a valuable benefit in return for the gift.
• Most states distinguish between income from economic activities that is “related” to the purposes of a PBO and income that is “unrelated” to the purposes of a PBO by:
  1. exempting income of a related economic activity (e.g. the sale of books & educational materials by a school); and
  2. taxing income of an unrelated economic activity (e.g. income received by a school from renting empty rooms during a vacation period). The rationale for this distinction is normally to prevent unfair competition between NGOs and private enterprises in the same area.
• Most states allow PBOs to carry forward a surplus from one year to future years, provided that the surplus is spent on the public benefit purposes within a reasonable period of time.

3. Income Tax Reliefs for Donors

• Many states use a more restricted definition of PBOs to determine which donations qualify for income tax relief for the donor than the definition used to decide which PBOs receive exemption from income tax on their income.
• Most states give some relief for gifts of money (other gifts are difficult to value).
• Most states limit the maximum amount of relief to a fixed amount or a percentage of taxable income.
• Most states give relief in the form of a deduction from taxable income
  (some states give a tax credit).
  1. Research to date suggests that tax relief is more of an incentive for richer donors than for everyone else, for example, if you have no money to give, tax relief means nothing. Additionally, many people give to NGOs for humanitarian not economic reasons.
• Simple procedures (e.g. workplace collections organised by employers and report via the payroll) and a lot of publicity may be more effective in raising levels of individual giving.

4. Value Added Tax (VAT) on Goods and Services

• The VAT is a European tax on the provision of goods and services as part of an economic activity that all EU member states (and all states that wish to join the EU) must include in their national law.
• Exemption from charging VAT on sales is generally granted according to the nature of the goods or services supplied, and not by reference to the identity of the supplier. For example, many supplies of education and hospital services are exempt, regardless of the supplier is a business or a NGO.
• NGOs need to consider not only whether they have to charge VAT on their sales but also whether they pay VAT on their purchases.
• Total (or partial) exemption from VAT means that a NGO cannot recover any or part of the VAT paid on its purchases.
•  Some states have a special scheme where the government compensates such NGOs that are wholly or partly exempt for portion of the VAT that they have paid on their purchases.

5. Local Taxes

• Tax benefits are usually granted using the same principles that are used in national tax laws.
• The decision to grant local tax benefits can be made by the:

1. central government;
2. local government independently of central government; or
3. local government within limits set by central government.

D. Delivery of tax benefits to NGOs

• Tax relief is a more flexible means of support than direct grants.
  This is so because the value of tax reliefs increases automatically as income rises, and tax reliefs are not normally subject to the same level of political or public comment as public expenditure.
• All states need a simple reporting system for all taxpayers that are granted tax privileges so that they can measure the cost (in lost tax revenue) of granting these tax privileges.
• Tax law is complex and tax advice is expensive.
• NGOs need help to obtain the benefits for which they are eligible, and to comply with all the tax regulations.
• Tax authorities can help by co-ordinating the provision of free tax information and basic advice on all taxes affecting NGOs. This may be done via designated officials in designated tax offices with experience with NGO tax laws.
• If tax benefits are granted without conditions and verification procedures, there is a risk that a minority of NGOs will abuse the system and damage the reputation of the whole NGO sector.
• Penalties for failure to comply with tax laws should be reasonable in relation to the nature of the offence so that the financial stability of an organisation is not at risk simply because it made an honest mistake.