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