Tax incentives for philanthropy – added value and trends discussed at ERNOP webinar
By Hanna Surmatz, for Philanthropy Advocacy, a joint Dafne and EFC initiative
More than 100 researchers and practitioners joined the European Research Network On Philanthropy (ERNOP) webinar on taxation, philanthropy and implications for practice on 25 May to discuss philanthropy taxation trends, rationale and effectiveness of tax incentives. I had the honour and pleasure to moderate and comment on the presentation of Giedre Lidelkyte Huber, Senior Lecturer at the faculty of Law at Geneva Centre for Philanthropy at the University of Geneva, who presented key findings from the recent in-depth OECD report on the matter. It also provided a good opportunity to compare and cross-check with some of our own Philanthropy Advocacy data findings and analysis on philanthropy taxation.
Beyond the philanthropic community, taxation has received much more attention by policy makers, the media, the academic community, and the public at large. It is clear that current policy and societal challenges require concerted action of different actors: policymakers are becoming aware that philanthropy needs an enabling environment to unleash its full potential for public good.
What are the trends and best practices looking at philanthropy taxation? Are tax incentives for philanthropic actors justified? What is the rationale of governments to introduce them? Are they effective – do they trigger a desired increase of philanthropic action? Do they influence decision making and/or practice in philanthropic actors? Are tax incentives a cost or a benefit to society? Can they be abused for tax evasion or tax fraud purposes? These were only some of the questions that we had the opportunity to discuss at the webinar, however clearly also creating more appetite to dive deeper into some of these aspects.
The first part of the debate circulated around the rationale for tax incentives and arguments against and in favour of tax incentives. Philanthropy’s contribution to the public benefit and the fact that governments give up some of their revenue to acknowledge this fact got stressed. Looking at corporate income tax exemption for philanthropic organisations, the surplus that these entities generate is different in nature from those generated by for profit entities and should hence not be taxed.
Counter arguments were also presented such as the fact that tax incentives to philanthropic actors could create unfair competition, being costly to the state budgets and not even frequently used by tax payers. The discussion revealed that it is the public benefit work and the key public benefit characteristics of philanthropic organisations work that justify tax incentives. Clearly, tax incentives want to stimulate more giving and the creation of more public benefit work, but do they deliver the desired increase? More research may be needed to showcase the actual added value and efficiency of current regimes.
The OECD report and our own data gathering reveal that while details of national tax laws differ, commonalities can be identified on the big lines and core criteria for the public benefit tax exempt status of legal entities such as: pursuing exclusively a public benefit purpose and following a non-distribution constraint/usage of the assets for the public benefit purpose as well as benefiting the public at large. The discussion circulated around different approaches of open and closed list of public benefit purposes and that these purposes are under constant review, taking into account the political societal context such as climate crisis now having been included as an explicit mention in a couple of countries.
Governments seem to use the tax law as a way to stimulate more investments and activities into certain policy areas. The question as to whether tax incentives also influence the way philanthropic organisations will also need further analysis. The OECD report also considers the tax treatment of economic activities and the potential interplay with competition law and state aid rules was mentioned.
Giedre presented tax incentives for giving and also added matching funds schemes by public actors as well as so called percentage law systems where tax payers allocate a certain percentage of the taxes paid to NPOs – this is a practice in Poland, for instance. As was stressed by the then following debate, such percentage law systems are not real tax incentives. More research would also be needed to fully grasp whether tax incentives are a cost to society and governments or a benefit.
I referred to a recent study undertaken by PwC and SwissFoundations Switzerland that argues that tax incentives are not a burden to the state budget but rather a benefit to the society. Do tax incentives matter? Do donors give more because they exist? Research on the matter suggests that they are not the only decisive factor for a donor to consider but that they encourage donors to give. Clearly most funders and donors take tax rules into account when deciding how much to give and which purposes to pursue. Giedre also presented some research undertaken in Switzerland that revealed that high income individuals seem to deduct more philanthropic giving in their tax returns than lower income households.
From practitioners and philanthropy infrastructure side it is clear that we are advocating for tax incentives as part of an overall enabling environment for philanthropy and we have seen from our own analysis that the introduction or increase of tax incentives has triggered more philanthropic action.
The level of international philanthropic giving and international action of public benefit organisations has grown, with more European citizens and corporate donors willing to make cross-border gifts and donations to support international causes and foreign EU based public benefit organisations.
When it gets to the tax treatment of cross-border scenarios, one has to distinguish between EU and non-EU countries. Outside of the EU tax incentives are often landlocked, that is they are restricted to domestic public-benefit organisations and donors giving to domestic organisations. Most countries provide for tax incentives for individual and corporate donors giving to domestic scenarios either in form of a tax credit or a tax deduction but they are not granting this to cross-border cases. Also Double tax treaties do not generally include a clause on public benefit organisations or giving. Here the OECD Model Tax Treaty could potentially be amended to consider this.
The situation in the EU is different, since important decisions of the European Court of Justice (e.g. Stauffer, Persche, Missionswerk cases) developed the general non-discrimination principle, implying that public benefit organisations and their donors (be they individual or corporate donors) acting across borders within the EU are entitled to the same tax incentives as would apply in a wholly domestic scenario. The condition being that the foreign EU-based organisation can be shown to be comparable to a domestic one. EU Member States are hence under an obligation to treat comparable foreign EU-based philanthropic organisations and their donors not discriminatory to domestic organisations and their donors. A series of EU infringement procedures have helped “encourage” Member States alignment with the Treaty of the Functioning of the EU.
However, as I could point out in the conversation, in practice – barriers still exist. The 2014 joint EFC-TGE study, “Taxation of cross-border philanthropy in Europe after Persche and Stauffer – From landlock to free movement?”, the 2017 EFC/TGE study as well as our 2020 follow-up legal research in 40 EU and non-EU countries, outlining how several Member States have not yet removed this discrimination – and even where they have, practical or legal problems persist.
Across the EU no formal or uniform approach exists. Member States have developed different approaches to check if a foreign EU based organisation is comparable to a domestic one. In the majority of countries, however, no rules or even procedural guidelines for the tax authorities appear to exist. This presents a major challenge to ensure that the non-discrimination principle is being applied.
Administrative burdens continue to hamper the work of both larger endowed foundations investing their assets across-border as well as donors giving across borders. For transnational European philanthropic giving and investments, the single market for public benefit foundations and association and free movement of philanthropic capital does not yet work. The European Philanthropy infrastructure (European Foundation Centre and Donors and Foundation Networks in Europe have joined forces) has hence been calling for a single market for philanthropy and public good and made proposals to overcome barriers to cross-border philanthropy embedded in the wider European Philanthropy Manifesto.
ERNOP Science and Society Seminar Series 2021
An important source for innovation and growth comes from research and development. Members of ERNOP produce the best of research on philanthropy within the continent, but only limited output makes it to the board rooms, decision tables and policies of philanthropic organizations. The gap between production and usage of academic knowledge is a waste of valuable resources. With the ERNOP Science and Society Seminars, ERNOP takes the initiative to start building a bridge. The one-hour seminars consist of a presentation, a moderated discussion and finally a question round for participants. Learn more..
Relevant Links
Event overview ERNOP Seminar: Taxation, philanthropy and implications for practice
Recording ERNOP Seminar: Taxation, philanthropy and implications for practice
OECD Report on Taxation and Philanthropy