Post on 26-Dec-2015
LEGAL FRAMEWORKS: DO LEGAL FRAMEWORKS: DO TAX INCENTIVES AFFECT TAX INCENTIVES AFFECT PRIVATE CONTRIBUTIONS PRIVATE CONTRIBUTIONS TO NON-PROFIT SECTOR?TO NON-PROFIT SECTOR?
Ukrainian Citizen Action Network/European Law Ukrainian Citizen Action Network/European Law Advancement Network (Ukraine), June 2008Advancement Network (Ukraine), June 2008
Acknowledgements to International Center for Not-Acknowledgements to International Center for Not-for-Profit Law and European Foundation Center for-Profit Law and European Foundation Center
Key question: mind average donorsKey question: mind average donors
Which taxpayers make charitable Which taxpayers make charitable contributions to endowments and other contributions to endowments and other foundations? foundations?
To what extent will the deduction increase To what extent will the deduction increase their giving? their giving?
To what extent will the deduction To what extent will the deduction complicate tax filing, and will tax evasion complicate tax filing, and will tax evasion increase? increase?
Major options for tax incentivesMajor options for tax incentives
Unlimited deductions Unlimited deductions Deductions up to maximum percentage of Deductions up to maximum percentage of
taxable income/turnovertaxable income/turnover Deductions more than a minimum amountDeductions more than a minimum amount Deductions up to a maximum amount Deductions up to a maximum amount
Percentage laws on giving some of paid Percentage laws on giving some of paid tax contributions to certain foundationstax contributions to certain foundations
Individual donorsIndividual donors
Individual charitable giving shows some Individual charitable giving shows some insensitivity to its tax price, and differ insensitivity to its tax price, and differ rather in culture and social context termsrather in culture and social context terms
Individual donors rarely think the direct Individual donors rarely think the direct government grants to be equal or socially government grants to be equal or socially superior optionsuperior option
Percentage laws on giving some of paid Percentage laws on giving some of paid tax contributions to certain foundations, tax contributions to certain foundations, however, may be however, may be feltfelt as a tax incentive as a tax incentive
Individual donorsIndividual donors
Whatever are tax rates, income Whatever are tax rates, income distribution and charitable giving purposes, distribution and charitable giving purposes, the top income quintile (20%) use two the top income quintile (20%) use two third, at least, of tax deductions for third, at least, of tax deductions for individual donorsindividual donors
Sensitivity of tax payers with lower income Sensitivity of tax payers with lower income to tax incentives and itemization tend to be to tax incentives and itemization tend to be uncertain or differ in cultural contextsuncertain or differ in cultural contexts
Corporate donorsCorporate donors
In general, corporate donors are far more In general, corporate donors are far more sensitive to tax incentives due to their sensitive to tax incentives due to their liabilities and reporting to shareholdersliabilities and reporting to shareholders
Corporate donors tend to use long-term Corporate donors tend to use long-term instruments and allowed business instruments and allowed business expenses in charitable giving, tooexpenses in charitable giving, too
Short-term tax incentives tend to have less Short-term tax incentives tend to have less elasticity than carrying forward deductionselasticity than carrying forward deductions
Conclusions on donorsConclusions on donors
While individual donors make majority of While individual donors make majority of donations, tax price is not a decisive donations, tax price is not a decisive considerationconsideration
Individual donors with lower income tend Individual donors with lower income tend to use tax incentives on case-to-case to use tax incentives on case-to-case basis and to avoid long-term instrumentsbasis and to avoid long-term instruments
Corporate donors, if no tax incentives, Corporate donors, if no tax incentives, tend to consider their giving as investmenttend to consider their giving as investment
Major options’ implementationMajor options’ implementation
Actually, national tax legal frameworks Actually, national tax legal frameworks usually combine two or more of the usually combine two or more of the abovementioned four options of tax abovementioned four options of tax incentives for donors in order to decrease incentives for donors in order to decrease budget revenue lossbudget revenue loss
27 European Union members do show 27 European Union members do show diversity in approaches to tax incentives diversity in approaches to tax incentives for donors, while only five countries have for donors, while only five countries have no tax incentives for individual donorsno tax incentives for individual donors
Unlimited deductionsUnlimited deductions
In EU, Great Britain and Cyprus grant In EU, Great Britain and Cyprus grant unlimited deductions for all donors, and unlimited deductions for all donors, and Ireland and Portugal for corporate donorsIreland and Portugal for corporate donors
Unlimited deductions cause maximum Unlimited deductions cause maximum budget revenue loss, while only small budget revenue loss, while only small groups of taxpayers do take advantagegroups of taxpayers do take advantage
However, unlimited deductions are crucial However, unlimited deductions are crucial for donations of real estate, land etc., if for donations of real estate, land etc., if they may not be carried forwardthey may not be carried forward
Deductions up to a Deductions up to a maximum amount (cap)maximum amount (cap)
The only type of tax incentive when charitable The only type of tax incentive when charitable giving declines more than revenue loss; in EU, giving declines more than revenue loss; in EU, they are used in Belgium, Denmark, Finland, they are used in Belgium, Denmark, Finland, Italy and Malta; special cap up to 307,000 euro Italy and Malta; special cap up to 307,000 euro for donations to endowments in Germanyfor donations to endowments in Germany
There are no incentives to give beyond the There are no incentives to give beyond the ceiling under this option ceiling under this option
Verifying many small amounts is difficult for tax Verifying many small amounts is difficult for tax authorities and increase tax evasion, while authorities and increase tax evasion, while keeping records does not encourage smaller keeping records does not encourage smaller contributors to use this deductioncontributors to use this deduction
Deductions more than Deductions more than a minimum amounta minimum amount
In EU, seven countries use this deduction, In EU, seven countries use this deduction, virtually all in combination with maximum virtually all in combination with maximum percentage of taxable incomepercentage of taxable income
Such deductions do not encourage those who Such deductions do not encourage those who could not afford contributions or do not could not afford contributions or do not contribute currentlycontribute currently
Donors having the lowest and highest income, Donors having the lowest and highest income, which have to contribute more than they wish in which have to contribute more than they wish in order to get tax deduction, are strongly criticalorder to get tax deduction, are strongly critical
Deductions up to a maximum Deductions up to a maximum percentage of taxable incomepercentage of taxable income
This deduction is most common in EU, This deduction is most common in EU, though only nine countries do not combine though only nine countries do not combine it with other tax limitationit with other tax limitation
Seven countries allow deductions of 19-Seven countries allow deductions of 19-66% of donations value up to a maximum 66% of donations value up to a maximum percentage of individual income, while for percentage of individual income, while for companies it can amount to 100-120%companies it can amount to 100-120%
At least, four countries allow alternative At least, four countries allow alternative tax base (turnover, salaries, investments)tax base (turnover, salaries, investments)
Maximum percentage, EU Maximum percentage, EU
0
1
2
3
4
5
6
7
8
9
10
up to 5% 5-10% 10-20% 20%+
Individual
Company
Conclusions on impactsConclusions on impacts
Deductions up to a maximum amount are Deductions up to a maximum amount are the least effective for private giving; filing the least effective for private giving; filing is the easiest, but tax evasion is the is the easiest, but tax evasion is the highesthighest
Deductions more than a minimum amount Deductions more than a minimum amount are usually used for special purposes or are usually used for special purposes or beneficiaries; filing is easy, tax evasion is beneficiaries; filing is easy, tax evasion is low or mediumlow or medium
Conclusions on impactsConclusions on impacts
Unlimited deductions tend to increase giving by Unlimited deductions tend to increase giving by a smaller group of donors; filing is easy, but high a smaller group of donors; filing is easy, but high tax evasion and budget revenue loss makes bad tax evasion and budget revenue loss makes bad public imagepublic image
Multiple maximum percentage deductions are Multiple maximum percentage deductions are the most common in EU, filing problems and tax the most common in EU, filing problems and tax evasion are medium; however, these deductions evasion are medium; however, these deductions are usually effective, if combined with carrying are usually effective, if combined with carrying forward deductions in future years forward deductions in future years