6. Conclusions and policy options
This concluding chapter brings together the key insights from the report and discusses their tax policy implications. It highlights the importance of countries ensuring that the design of their tax incentives for philanthropic giving are consistent with their underlying policy goals. It also suggests that countries reassess the merits of providing tax exemptions for the commercial income of philanthropic entities, at least insofar as this income is unrelated to the entity’s worthy purpose. More broadly, it finds scope for countries to both reduce the complexity and improve the oversight of their concessionary regimes for philanthropic entities and philanthropic giving. Finally, in light of the increasingly global nature of many policy challenges – such as environmental and public health concerns (including the COVID-19 pandemic) – it suggests countries reassess the restrictions commonly imposed on access to tax concessions for cross-border philanthropy.
Philanthropy plays an important role in most countries, providing private support to a range of activities for the public good. This differentiates the sector from government initiatives (i.e., public action for the public good) and profit-based initiatives (i.e., private action for the private good). Almost all OECD countries provide some form of preferential tax treatment for philanthropy. Entities with a philanthropic status typically receive tax relief directly in relation to their activities, while both individual and corporate donors to these entities are typically able to receive tax incentives that lower the cost of giving.
This report has undertaken a detailed review of the tax treatment of philanthropic entities and philanthropic giving in 40 OECD member and participating countries. It has first examined the various arguments for and against the provision of preferential tax treatment for philanthropic entities and giving. It has then reviewed the tax treatment of philanthropic entities and giving in a domestic context, before then examining the cross-border taxation of philanthropy. This final chapter brings together the insights from this analysis and discusses their tax policy implications.
This chapter is structured as follows. Sections 6.2-6.5 summarise the key messages from the preceding chapters in the report. Section 6.6 then presents the resulting conclusions and discusses a range of policy options.
Chapter 2 summarised the various arguments for and against the use of tax concessions for philanthropic entities and philanthropic giving. This highlighted that there is no single generally accepted rationale for preferential tax treatment of philanthropic entities. Economic theory provides a limited rationale for providing tax concessions for philanthropy (potentially both for entities and giving) where there is under-provision of a public good or where there are positive externalities associated with the activity of the philanthropic entity. The under-provision of a public good rationale requires there to have been a combination of “market failure”, “government failure” and “voluntary failure”, in the sense that the private market, government, and voluntary sector are all unable to provide the welfare-maximising level of public good provision.
A related public good-based rationale put forward by legal scholars posits that tax favoured status (again potentially for both entities and giving) is justified on the basis that it provides a subsidy for the provision of public goods that would otherwise be required to be provided by the state (the “subsidy” rationale). Another often articulated argument is the “base defining” rationale which argues that the surplus of a philanthropic entity is different in nature to income and therefore beyond the scope of the income tax base. Additional arguments include that philanthropic giving, as well as the institutions it develops, strengthen civil society and decentralise decision-making, and are thus an important feature of a democratic society and worth supporting.
A number of arguments have been raised against the provision of tax preferences for philanthropic entities and/or giving. The cost of providing concessions is often highlighted as a concern. By reducing government revenue, tax concessions for philanthropy require other taxpayers to bear an increased tax burden (or alternatively result in less government expenditure on other policy priorities). Another argument, is that taxpayers are often relatively unresponsive to tax incentives for philanthropic giving, suggesting they may not be “treasury efficient” in the sense that they increase giving by less than the tax revenue lost. Empirical evidence on the elasticity of giving provides some support for this argument. However, it is important to note that a tax incentive could be treasury inefficient but still welfare improving if the benefit to society of the activity funded by the giving is sufficiently large. While grants could in this case be more effective, concerns of government grants crowding out private donations may in some instances still justify the use of tax incentives. A concern regarding exemption of commercial income of philanthropic entities is that this may create an unfair competitive advantage for philanthropic entities over for-profit businesses.
Two related concerns that are raised regarding tax incentives for giving are that they may be regressive and undemocratic. Tax incentives may be regressive in that higher income taxpayers benefit from a larger tax incentive than lower income taxpayers. This can be the case in both aggregate terms, but also in proportionate terms as a tax deduction will provide a greater benefit to higher income taxpayers if they are subject to higher marginal tax rates than lower income taxpayers. The democratic argument highlights the concern that, as a tax incentive effectively reallocates tax revenue towards the favoured philanthropic entity, higher income taxpayers that make greater donations benefit from a disproportionate influence in the determination of how tax revenue is spent. This may be of particular concern where the priorities of donors are not consistent with those of society in general. Greater control by the government over the range of entities for which donations are eligible for tax incentives may limit this concern to some extent.
Irrespective of these arguments, most countries do provide tax incentives for giving, and in general provide exemptions from some taxes for philanthropic entities. The next sections summarise the approaches countries have taken.
In almost all of the countries analysed in this report, entities with a philanthropic status (funds and PBOs) can receive tax incentivised gifts from individuals and corporations, as well as receive tax relief directly in relation to their activities. The report finds that for an entity to receive a philanthropic status with the associated tax benefits, it must meet not-for-profit, worthy purpose, and public benefit requirements.
The not-for profit requirement does not prohibit a philanthropic entity from making a surplus, instead, it generally includes non-distribution requirements so that the surplus is not distributed as dividends or other benefits beyond the scope of the entity’s worthy purpose. An issue that can arise is whether the payment of some salaries to employees breaches this notion of ‘non-distribution’. This report finds that generally the requirement does not prevent the payment of ‘reasonable’ remuneration for services (or the provision of goods). Some countries may impose restrictions in this regard, while others may be less prescriptive.
With regard to the worthy purpose requirement, welfare, education, scientific research, and health care are deemed worthy purposes most frequently across countries. Countries generally stipulate that the benefit must be open to all, that the benefit can be restricted to groups with specific characteristics, or that the characteristics used to specify who can benefit must relate to the fulfilment of the entity’s worthy purpose.
Additionally, to help assess whether entities meet these requirements, countries tend to impose a number of administrative requirements. Almost all countries surveyed in this report require philanthropic entities to undergo a specific application process to become eligible for preferential tax treatment. Countries typically follow one of three broad approaches in determining the administrative and oversight body. Under the first approach, the tax administration is responsible for oversight of the sector (including the accreditation process). The second approach is to assign the responsibility to both the tax administration and a competent authority such as an independent commission. Lastly, in some countries the accreditation and oversight responsibility lies entirely with another department and not the tax administration.
The report identifies two approaches for providing tax relief for the income of philanthropic entities: the first is to exempt all or specific income, and the second is to consider all forms of income taxable, but allow the entity to reduce its taxable income through current or future reinvestments towards the fulfilment of its worthy purpose. Countries following the first approach generally exclude non-commercial income (received gifts or grants) from the tax base. Approaches to dealing with commercial activities and the income generated from those activities, diverge. Countries, whose philanthropic entities are fully income tax exempt, restrict these entities from engaging in certain kinds of activities. On the other hand, countries that want philanthropic entities to pay taxes on some of their income generally differentiate between commercial income that is related and unrelated to the worthy purpose.
The report also finds that countries that offer preferential VAT treatment to philanthropic entities tend to exempt them from having to collect VAT on certain (or all) supplies. As such an exemption can create an input tax burden, some countries have implemented rules that enable philanthropic entities to reclaim a portion of their input tax.
Philanthropic entities may own real estate that they use to fulfil their social objectives, or they may own it as a source of income. The report finds that, in some countries, entities that use their real estate for their worthy purpose, such as the location of offices or philanthropic activities, may be exempt from property taxes.
A number of common types of abuse of the preferential tax treatment provided to philanthropic entities are identified in this report. For example, they include diverting funds intended for public purposes to private benefits, for-profit businesses posing as PBOs to benefit from the tax relief; philanthropic entities investing in corporations owned or controlled by employees or managers of the entity; salaried employees concealed as volunteer workers; or entities not registered for VAT that are undertaking taxable activities.
In most of the countries surveyed, individual taxpayers that give to a qualifying fund or PBO receive some form of tax incentive. In the large majority of countries surveyed, donations are deductible. Other countries offer tax credits instead and, in some cases, the donations of individuals are matched or facilitated through an allocation scheme. In countries with a matching scheme, government tops up donations at a given rate so that the entity receiving the donation is able to claim the tax relief. In countries with an allocation scheme, the tax administration allows taxpayers to designate a fixed percentage or amount of their income tax to a fund or PBO directly through their tax return. Although allocation schemes are not tax incentives, they are included in this discussion as they are administered through the tax system and their objective is to support philanthropy. Unlike individual donors, companies can also claim deductions (under standard business expensing rules) for corporate sponsoring of philanthropic entities. As a result, the report finds that deductions are more common for incentives for corporate donors than for individual ones.
In countries with no tradition of philanthropic giving, an allocation scheme can create awareness among taxpayers, financially support funds and PBOs, and develop stronger ties between the general public and philanthropic entities. The report finds that allocation schemes were introduced mainly in eastern European countries and may thus be a part of a regional trend.
Countries’ approaches to limiting the fiscal cost of their incentives vary. Countries that provide tax deductions, may cap the share of the donation that is deductible, cap the size of the deduction to a share of taxable or total income, cap the size of the deduction to a fixed value, or use a combination of these ceilings. Countries that provide a tax credit, may cap the value of their tax credit to a share of taxable or total income; a share of the income tax liability, a fixed value, a combination of ceilings, or cap the size of the donation that is creditable. To limit the cost of matching schemes, countries set the rate at which the relief may be claimed by the receiving philanthropic entity.
The report also finds that countries that levy inheritance or estate taxes generally provide preferential tax relief for philanthropic bequests. In countries with an inheritance tax, the PBO or fund receiving the bequest are liable for the tax and thus are the ones that receive the tax relief. In countries with an estate tax, on the other hand, the tax liability as well as the corresponding tax relief is with the estate of the deceased.
The majority of countries that incentivise cash donations of individuals also incentivise non-monetary donations. Nevertheless, some countries choose to limit their tax incentives to cash donations only, and some severely restrict the size and nature of non-monetary donations. With respect to countries that incentivise non-monetary donations, the report identifies a number of different approaches to designing valuation rules: some countries require appraisals if the value of a non-monetary donation exceeds a threshold, others have different valuation rules for different types of assets and a number of countries do not require appraisals and review valuations through audits.
Corporate sponsoring of philanthropic entities (i.e. payments in return for publicity or advertisement) is considered a business expense in most countries, as long as there is a sufficient nexus with earning income. However, the report finds that, in a number of countries, these payments may be considered commercial income of the philanthropic entities receiving them and thus have tax implications.
Common types of tax avoidance and evasion issues with tax relief for philanthropic giving include: falsified donation receipts prepared by the philanthropic entity, tax preparers or donors; payments for goods and services disguised as donations; overvalued gifts; and donations of assets in which the donor retains an interest. Given that a key anti-abuse policy is that the recipients of philanthropic giving must be accredited philanthropic entities, the majority of anti-abuse policies identified in the report are in the form of transparency and reporting requirements for funds and PBOs. This allows the tax administration to focus its resources on these entities and generally shifts the onus of demonstrating that the worthy purpose and public benefit requirements have been satisfied on to the philanthropic entities that receive the donations.
The report has also examined the tax treatment of cross-border philanthropy. Cross-border philanthropy can occur where a person (an individual or a corporation) makes a gift to an entity in another jurisdiction (‘direct philanthropy’). Cross-border philanthropy can also occur where a domestic philanthropic entity operates in another jurisdiction or where a foreign entity operates domestically (‘indirect philanthropy’).
The report finds that, beyond the European Union (EU), there is little tax support provided by countries for cross-border giving. Within the EU, Member States are governed by European Court of Justice (ECJ) rulings requiring Member States to adopt a ‘comparability’ approach to ascertain whether a gift to a philanthropic entity in another Member State is entitled to tax relief. This typically requires a case-by-case analysis to determine eligibility, and due to differences between Member States relating to tax relief, can result in considerable complexity and uncertainty. The report finds that the ECJ rulings have not been fully adopted by all Members of the EU. Beyond the EU, there are a small number of bilateral treaties (such as the US-Canada and US-Mexico treaties) where tax relief may be obtained for a donation in the partner country. There are also a small number of countries (e.g. Canada) that provide tax concessions for donations to certain approved foreign PBOs. The limitations imposed on tax support for cross-border giving have led some philanthropic entities to establish ‘work arounds’ with entities in various jurisdictions, so that gifts can be made to domestic entities (that are eligible for tax relief) but are then passed on to entities in other countries.
With regard to PBOs that operate across borders, most countries do not provide tax relief for foreign philanthropic entities. The position in the EU is again governed by ECJ rulings requiring Member States to adopt a ‘comparability’ test to determine the eligibility of an entity in another Member State for tax relief. Beyond the EU, there are a small number of countries that provide tax relief for foreign philanthropic entities on a case-by-case basis (e.g. Australia, Canada, Indonesia). The inability of foreign entities to qualify for tax relief has meant that many entities that operate internationally establish local entities that are eligible for tax relief.
Many, but not all, countries provide tax relief to domestic entities that operate abroad, particularly where the activities are related to humanitarian relief or development assistance. Typically, this authorisation is reliant upon the philanthropic entity respecting the worthy purpose requirements imposed by the national legislation, usually similar to the requirements imposed on domestic PBOs.
While, as noted above, there are arguments both in favour of and against the use of tax incentives for philanthropy, in practice most governments judge them as worthwhile. This section draws on the preceding analysis to highlight a number of key issues that countries face in the design of their tax rules for philanthropic entities and philanthropic giving.
First, it is important that countries ensure that the design of their tax incentives for philanthropic giving are consistent with their underlying policy goals. Second, there is scope in many countries to reassess the design of tax concessions for philanthropic entities. More broadly, countries should also look to both reduce the complexity and improve the oversight of their concessionary regimes for philanthropic entities and philanthropic giving. Finally, there may be merit in countries reassessing the restrictions that are typically imposed on cross-border philanthropic activity. These issues are discussed in more detail below.
6.6.1. Ensuring the design of tax incentives for philanthropic giving meets policy goals
Designing tax incentives for philanthropic giving is complicated due to the need to balance a range of potential policy goals. While the overall aim of a tax incentive can be seen as maximising social welfare, determining how to achieve this is challenging and requires various value judgements to be made. Broadly speaking, trade-offs must be made between incentivising giving, limiting fiscal cost, and managing both the distributional and democratic (in terms of influence over how tax revenue is spent) impacts of the tax incentive. A range of design choices impact on these goals.
Choice of eligibility criteria
Most countries allow tax incentives for a broad range of worthy purposes. The choice of eligibility criteria offers policy makers a means of targeting the benefit of tax concessions. Narrower eligibility conditions will ensure tax concessions more tightly target activities that align with the priorities of policy makers, but may result in a lower level of total giving. In contrast, wider eligibility conditions will ensure that the philanthropic priorities of a wider range of taxpayers are eligible for concessionary treatment and may therefore lead to increased giving.
Countries that are particularly concerned about restricting support to those areas prioritised by government may wish to consider limiting the breadth of eligibility. For example, by restricting eligibility to activities that directly support those suffering from poverty, illness and disability. Ensuring that tax incentives are limited to a narrow scope of activities is likely to be a more effective means of targeting support than by imposing fiscal caps (see below).
Tax deductions vs tax credits
As noted above, the most popular tax incentive for philanthropic giving across the countries examined in this study is a tax deduction. However, for countries with a progressive personal income tax (PIT) system, a deduction will disproportionately benefit higher income taxpayers because the benefit of the deduction increases with the marginal tax rate of the giver. This may create distributional concerns in light of the broader goals of progressivity and redistribution associated with the progressive PIT systems adopted in most countries. Furthermore, it may also create concern regarding the increased degree of influence that high-income taxpayers are given in the determination of how tax revenue is spent (with richer households potentially favouring different types of philanthropic activities than poorer households), and the consistency of this with democratic principles. This, in turn, may exacerbate distributional concerns if higher income taxpayers not only benefit more in terms of the tax concession they receive, but also in terms of the benefit they derive from the type of activities the tax-incentivised giving funds. At the same time, providing a greater tax incentive to richer taxpayers is likely to result in greater increases in aggregate philanthropic giving both because the bulk of giving comes from higher income as compared to lower income taxpayers and they are also more responsive to tax incentives.
In contrast, countries particularly concerned about distributional impacts, may wish to consider moving to a tax credit. A tax credit will ensure that the same proportionate tax benefit is provided to taxpayers irrespective of their income level. Providing a credit that is lower than the deduction currently available to top-PIT rate taxpayers may reduce the incentive to give among high-income earners. Alternatively, matching the top-rate may come at some additional fiscal cost. This creates a trade-off that governments will need to balance. At a minimum, countries with deductions should reassess the merits of maintaining the deduction to ensure that the decision to maintain the deduction is based on a clear policy decision to provide a greater incentive to higher income taxpayers.
Fixed vs percentage-based fiscal caps
Restrictions on the size of tax incentives are common in light of countries’ desire to restrict the fiscal cost of their tax incentives for giving. Some countries adopt caps on the size of the tax incentive set equal to a specific fixed currency amount, while others adopt caps based on a percentage of the donor’s income or tax liability, and some adopt a combination of both.
The adoption of such caps do, however, have an impact on both the degree of incentive provided by the concession and their distributional impact. A fixed cap will result in no taxpayers above the cap receiving any additional incentive to give on their marginal earnings, thereby reducing the amount of giving. The extent of the restriction will depend on the level of the cap set. Such a cap may improve distributional outcomes as it will ensure that the maximum potential aggregate benefit available to both poor and rich households will be the same. It will also cap the influence of high-income taxpayers in the determination of how tax revenue is spent. However, the imposition of a relatively high cap may be binding on high-income taxpayers but not on low-income taxpayers and will still result in a greater concession being provided to high-income taxpayers in practice.
A percentage-based cap will instead equalise the maximum potential proportional benefit available to both poor and rich households. Richer households will still benefit more in aggregate terms, but not in proportional terms (with a proportionate cap more likely to be binding on lower income households than a high fixed cap). For a given fiscal cost, this may result in a greater increase in giving than a fixed cap due to the greater responsiveness of higher income taxpayers. As such, if a country aims to maximise total giving for a given fiscal cost then it should consider applying a percentage based cap, rather than a fixed cap. If instead distributional concerns are of high importance then consideration may be given to applying a fixed cap. An alternative option in balancing these goals may be to combine a percentage-based cap together with a generous fixed cap. Such an approach may be of particular merit for countries concerned about the disproportionate influence of high-income taxpayers in the determination of how tax revenue is spent.
Allocation schemes
A small number of countries apply allocation schemes, where taxpayers can designate a fixed percentage or amount of their income tax to a fund or PBO directly through their tax return. Allocation schemes can increase the visibility of the philanthropic sector and create a culture of giving in a country where there is no such a culture. However, allocation schemes do not provide a tax incentive to give and so are unlikely to have a significant impact on the level of giving. As such, the use of tax incentives should generally be preferred where the aim is to increase the level of giving.
6.6.2. Preferential tax treatment of philanthropic entities
As stated above, a common approach of countries that provide tax concessions to philanthropic entities, is to exempt all or specific income of these entities. Furthermore, a number of countries exempt philanthropic entities from having to collect VAT on certain (or all) supplies. This section discusses the challenges that may arise as a result of these concessions and provides policy options that may reduce complexities and distortions as well as increase compliance.
Commercial income of philanthropic entities
Philanthropic entities may have commercial and/or non-commercial income, but the distinction is not always clear or the same across countries. Generally, non-commercial income refers to income from philanthropic gifts (discussed in Chapter 4) and government grants, or (in the case of PBOs) grants from supporting funds. Broadly, commercial income is income derived from the supply of goods or services in return for some form of payment.
If there are no restrictions on the commercial activities a philanthropic entity can engage in and the income from those activities is fully tax exempt, it may give rise to competitive neutrality and revenue loss concerns. To avoid such concerns, the report identifies a number of policy options. A common approach is to only exempt income generated from commercial activities that are related to the philanthropic entity’s worthy purpose. However, the definitions of related and unrelated commercial income vary widely across countries and such tax rules often result in significant complexity.
Other approaches are less complex, but may not fully exclude unrelated income from the preferential tax treatment. One approach is to only exempt income generated from commercial activities where it is reinvested towards the entity’s worthy purpose in a timely fashion. To facilitate some flexibility on behalf of the entities, such a policy could potentially be subject to an exception or allowance for the creation of small reserves that may be necessary to support the ongoing pursuit or expansion of the philanthropic entity’s activities that are directly connected to its worthy purpose. Another approach may be to limit the size of the expansion through a threshold beyond which income from commercial activities is taxed.
The competitive neutrality concerns associated with exempting the commercial income of philanthropic entities gives rise to an important issue that requires the attention of policy makers. For this reason, countries should reassess the merits of providing tax exemptions for the commercial income of PBOs, at least in so far as this income is unrelated to the entity’s worthy purpose. However, in undertaking such a reassessment, countries will need to consider the added complexities associated with distinguishing between taxable (i.e. unrelated commercial income) and exempt income and weigh the additional compliance and administrative costs against the pursuit of competitive neutrality.
VAT
Exempting philanthropic entities, or their activities from VAT may also lead to competitive neutrality concerns between for-profit and philanthropic entities. Furthermore, policies intended to refund parts of the tax paid on inputs tend to be very complex. Therefore, countries that currently provide an exemption should consider fully subjecting philanthropic entities to the VAT. As is typically the case with for-profit businesses, a registration threshold could be applied to exclude small philanthropic entities for whom compliance costs are likely to be disproportionate relative to the VAT revenue collected.
6.6.3. Reduce complexity
Another challenge for designing tax incentives for philanthropy is to find a balance between tailoring policies to the wide range of philanthropic activities and limiting the complexity of the tax system. This report identifies three key areas that could benefit from reducing the complexity of the tax rules in a number of countries: eligibility requirements for different kinds of tax incentives, tax rules for non-monetary donations and the valuation processes, and payroll giving.
Overly complex tax rules risk increasing compliance costs and uncertainty. This, in turn, can lead to both accidental and deliberate tax compliance issues. Complex tax rules and the related compliance costs that ensue may also put low-income donors and smaller philanthropic entities at a disadvantage compared to high-income donors and larger philanthropic entities. This is because the compliance costs may be lower in relative terms for high-income donors and large entities, which may also be more likely to afford tax advice from experts. Therefore, limiting complexity where possible has the potential of making tax incentives for philanthropy more efficient, less regressive, and increase overall compliance.
Eligibility requirements for different kinds of tax incentives
The report finds that in most countries, entities with a recognised philanthropic status are able to receive tax-incentivised gifts from individuals and corporations, or receive tax relief directly in relation to their activities. For an entity to be eligible for these incentives, it must meet not-for-profit, worthy purpose, and public benefit requirements. To reduce complexity, countries should consider applying the same eligibility tests for both kinds of incentives.
Non-monetary donations
A philanthropic donation can be in cash or non-cash form, with the latter frequently referred to as non-monetary or in-kind donations. Non-monetary donations may include: real and intellectual property; corporate stock or shares; trading stock; cultural assets; other personal property; services (volunteering); or blood and organ donations. To apply a tax incentive to non-monetary donations, the gift must be assigned a value. The valuation rules and process increase compliance and administration costs for donors, government, and in some cases the receiving entities. The valuation of a non-monetary donation determines the value of the tax incentive for the donor, and thus creates an incentive for donors to inflate the value of their donation. As such, valuation rules for non-monetary donations are intended to limit the possibility of abuse. Furthermore, the value of assets can fluctuate significantly. To the extent that the value of assets is subjective, valuation rules need to establish a process through which the value is determined as objectively as possible. This, in turn, may require a professional assessment (e.g., the valuation of artwork), which increases the compliance cost to whoever is responsible for the valuation.
In light of the complexities around valuation and the associated compliance costs, imposing a minimum value threshold for a non-monetary donation to receive concessionary tax treatment, may be warranted. Furthermore, countries may consider reassessing the kinds of non-monetary donations eligible for the tax incentives. When considering what kind of non-monetary donations to incentivise, the benefit resulting from the donation being non-monetary (as opposed to cash), should be weighed against the additional cost associated with the required valuation process and risk of abuse.
On the other hand, determining the kinds of non-monetary donations that could more effectively be made through cash donations, may be challenging as future needs are uncertain. For example, the COVID-19 health crisis has shown how an unexpected shortage in personal protective equipment (PPE) created a demand for non-monetary donations of masks and other PPE products. Similar needs can arise where natural disasters occur and often the provision of goods and materials that are urgently needed, may be more helpful than the provision of cash donations.
Payroll giving
A number of countries have introduced payroll giving schemes. These schemes enable employees to elect to have donations to approved philanthropic entities deducted from their income by their employer, and for them to receive the relevant tax incentive (deduction or tax credit), within an extended pay-as-you-earn withholding tax system. Effectively, they shift the compliance costs associated with giving from employees to employers – who may be able to more efficiently bear this compliance burden. Such schemes may therefore be an administratively efficient way to increase the effectiveness of a tax incentive for giving.
6.6.4. Improve oversight
Improving oversight of the philanthropic sector is important for protecting public trust in the sector as well as ensuring that the tax concessions used to subsidise philanthropy are not abused through tax avoidance and evasion schemes. This section provides an overview of policy options that may help protect public trust, increase compliance, limit loopholes and ultimately improve oversight of the philanthropic sector and its activities.
Publicly available register of approved philanthropic entities
Public trust and confidence in the philanthropic sector is a key priority for government as well as the sector itself. In part due to philanthropy’s reliance on private philanthropic giving, public trust is an essential component of financing the sector. Additionally, because philanthropy benefits from considerable tax support, public trust is also important in justifying and upholding the tax concessions used to subsidise philanthropic activities. A key way in which many countries improve transparency, certainty and accountability regarding what entities are eligible for receiving tax concessions as well as tax incentivised gifts, is to make publicly available a register of approved philanthropic entities. Countries that do not currently do so, should consider adopting such a publicly available register of approved philanthropic entities.
Such a policy may also help combat schemes in which fraudulent entities pretend to be eligible funds or PBOs in order to receive donations. Having a publicly available register would enable donors to cross-reference the information. Furthermore, a publicly available register invites public scrutiny, which may help to increase compliance and improve the detection of abuse.
Annual reporting requirements
A key challenge for oversight bodies (whether that is the tax administration, an independent commission or other department within the government) is to be able to collect the information needed to evaluate whether the philanthropic entities are complying with existing regulations and meeting the necessary requirements of organisations benefitting from preferential tax status. This report finds that in the majority of countries, entities have to go through an application process in order to qualify for the preferential tax status. Such a process, however, can only ensure that entities are compliant and meet the requirements at the time of their application (which frequently is at the start of their operations).
Imposing annual reporting requirements on funds and PBOs could improve oversight. This is because the oversight bodies are able to use the annual reports to keep track of philanthropic entities even after they have been granted preferential tax status. Such a policy may also help countries better identify errors or compliance issues early on, which may be beneficial for the entities as well. Furthermore, annual reports also have the potential to increase public trust, especially if some of the information in the report is made public. As annual reporting requirements may increase compliance costs, countries may wish to consider the adoption of a de minimis amount of revenue above which the reporting requirements would apply.
Combined oversight approach
The range of activities that philanthropic entities may engage in is typically very broad and thus it may be challenging for a tax administration to properly assess and oversee entities that are involved in fields that are not within the expertise of the tax administration. Additionally, it may be difficult for a revenue administration to justify the allocation of significant resources to the oversight of a largely untaxed philanthropic sector, resulting in a degree of under-supervision. To both improve the level of oversight in areas that require specific expertise, and alleviate the workload on the tax administration, countries should consider the adoption of a combined oversight approach. In a combined oversight approach, the tax administration and a competent ministry or commission with experts in a field related to the worthy purpose, would oversee the philanthropic entity and its activities.
Tax avoidance and evasion schemes
Abuse of incentives for philanthropic giving could deprive governments of much-needed revenues and risks undermining public trust in the government and the philanthropic sector. To reduce the risk of tax abuse, countries should consider a number of policy options:
Maintaining a database of suspicious activities to help identify trends and develop expertise on tax abuse related to tax concessions for philanthropy. Collecting data on suspicious activities may also assist the oversight bodies to conduct more targeted audits and thus become more efficient.
Exchanging good practices as well as information with tax administrations and law enforcement agencies may improve the efficiency of the oversight process as non-compliant actors in the philanthropic sector may already be on the radar of other law enforcement agencies. More specifically, exchanging information across law enforcement agencies may also strengthen the effort to ensure that organisations involved in illegal and inappropriate activities do not abuse the concessions afforded to the philanthropic sector to finance their activities.
Implementing limits to fundraising expenditures may be an effective approach to restrict tax-exempt entities from overspending on fundraising events.
Similarly, implementing rules that limit certain types of operating expenses of PBOs that are at an increased risk of being misused for the private benefit of people associated with the entity (e.g., vehicles, residential real estate, etc.) may limit schemes in which managers, employees, board members, or large donors use the assets of tax-exempt entities for their private benefit.
Limiting the remuneration of staff, managers, and board members of PBOs may help ensure that the untaxed income and donations received by philanthropic entities are not used for the personal gain of people associated with the entity. Unreasonably high remuneration may also be an indication of a scheme to circumvent the non-distribution requirement of the not-for-profit status. Therefore, limiting the remuneration that people associated with the entity can receive could be an effective policy at ensuring the not-for-profit requirement is met.
Screening non-resident PBOs and funds eligible for receiving tax-incentivised donations helps ensure that the requirements countries impose on resident entities that may receive tax-incentivised donations are also met abroad. Furthermore, screening non-resident PBOs is a key strategy of a number of countries to combat terrorist financing schemes involving philanthropic entities.
Implementing clear and transparent procedures for authorities to deal with non-compliance quickly.
Rules for corporate and individual giving
As discussed in Chapter 4, corporate philanthropic giving can occur in the form of donations or sponsorship payments. Sponsoring funds and PBOs are payments in return for publicity and thus generate a benefit to the donor. This report has highlighted that in many countries, sponsorship or advertising payments (which have a sufficient nexus with earning income) are deductible under business expensing rules and not subject to the limitations placed on deductions for corporate donations. This in turn may create an incentive for managers or owners of businesses to support causes through business sponsorship payments instead of personal donations in order to circumvent the limits placed on the tax incentives for philanthropic giving in a number of countries. Therefore, countries should better align rules for corporate and individual giving to limit distortions and ambiguities. This may be achieved by, for example, implementing similar limits for tax incentives for corporate and individual donations.
To do so, tax rules should clearly differentiate between donating and sponsoring. This may be done by, for example, requiring a sponsorship contract that clearly specifies the publicity the corporation will receive. This, in turn, allows policy makers to only provide deductions for sponsorship equal to the market value of the publicity/advertisement received in return for the payment. The amount of the payment in excess of the fair market value should be treated as a donation and subject to the respective limits.
Clearly differentiating between donations and sponsorship may also have important tax consequences for the philanthropic entity receiving the donation or the sponsorship payment. Countries that tax the commercial income of philanthropic entities may consider advertising to be a commercial activity and tax the sponsorship payments accordingly (while the income from donations is generally exempt).
Data collection and tax expenditure reports
Part of improving oversight of the tax incentives provided for philanthropy is to be able to estimate the cost of these incentives. To do so, countries should collect data and estimate as well as publish tax expenditures used to subsidise philanthropy. Furthermore, tax expenditure data may also enable countries to conduct studies that evaluate the efficiency of their individual incentives.
6.6.5. Reassess the current restrictions for international giving
Concerns regarding the degree of benefit (or lack thereof) to the country providing the tax concession, as well as regarding a potential lack of oversight, have resulted in only a very limited degree of tax support for cross-border philanthropy. However, the global nature of many of the challenges facing the world emphasises the importance of countries taking a global rather than an insular perspective. In particular, responding to issues such as poverty, war and conflict, environmental concerns, medical research, and public health issues such as pandemics, may require countries and institutions to cooperate across borders. A number of countries now also see a role for cross-border philanthropy in limited circumstances such as the provision of development assistance, and in relation to conflict situations.
In this context, there is merit in countries reassessing whether there may be some instances where equivalent tax treatment should be provided to domestic and cross-border philanthropy. For example, countries may wish to consider ensuring that domestic PBOs operating overseas for certain health, environmental and development assistance purposes, or those providing direct humanitarian support in conflict situations, should receive equivalent tax treatment to those operating domestically.
To address concerns regarding oversight and risks of abuse of tax concessions, countries could impose equivalent requirements as apply in the domestic philanthropy context, or require additional checks before providing tax-favoured status. Given the difficulties associated with monitoring and ensuring the compliance of philanthropic entities operating overseas, it would seem appropriate that additional checks and mechanisms would be required to ensure that the tax support provided is being directed towards the entities’ worthy purposes and that these entities are complying with all requirements that would be expected of entities operating domestically.
In the European Union, countries may wish to examine the possibility of explicitly incorporating the non-discrimination requirements of European Court of Justice (ECJ) rulings as they pertain to philanthropic entities into their domestic legislation. This may reduce uncertainty for both philanthropic entities and donors, and minimise compliance and administrative costs associated with the current case-by-case comparability analysis required under the ECJ rulings.