A report published by the OECD entitled Taxation and Philanthropy contains a detailed review of the taxation of philanthropic entities and donors in 40 countries, setting out potential policy options for countries.
Reasons for giving tax relief
There is a case for preferential tax treatment of philanthropy if there is under-provision of a public good or where there are positive externalities associated with the philanthropic activity. Generally philanthropic giving strengthens society and can be supported by tax relief. However, there are cost and distributional concerns, as higher income taxpayers can obtain larger tax relief, depending on the design of the relief.
Tax treatment of entities
An entity must generally meet requirements relating to “not-for-profit”, “worthy purpose” and “public benefit”. A worthy purpose would normally include welfare, education, scientific research, and healthcare goals. Public benefit requirements would require benefits to be open to a relatively broad section of the public.
Often commercial income is exempt if it is related to the worthy purpose and unrelated commercial income is taxed. Some countries give preferential value added tax (VAT) treatment to philanthropic entities and relief from other taxes such as property taxes.
Tax treatment of donors
In most of the countries surveyed donations were deductible from an individual’s taxable income. Some countries offered tax credits instead, and in some cases, individual donations were matched by the government. Corporate sponsoring of philanthropic entities was generally considered a deductible business expense. Tax relief generally applied to inheritance or estate taxes on philanthropic bequests.
There are often restrictions on the size of tax incentives for donations, such as a fixed or percentage cap. Most of the countries giving relief for donations also gave relief for non-monetary donations.
Cross-border philanthropy
Countries do not provide much tax support for cross-border giving. Many countries do however allow domestic entities to operate abroad without losing their favourable tax status, although often with additional restrictions or reporting requirements.
Conclusions
Countries need to align the tax incentives with their policy goals. For example a tax credit would give the same proportionate tax benefit to each donor regardless of income levels, whereas a tax deduction would offer a larger incentive to higher income donors.
Countries also need to consider the tax treatment of commercial income of philanthropic entities, especially if this is not connected to their philanthropic purpose. VAT treatment should also be considered carefully.
Tax systems could be simplifying by specifying the same eligibility tests for both philanthropic entities and philanthropic giving; a minimum value threshold for qualifying non-monetary donations; a publicly available register of approved philanthropic entities; annual reporting requirements; improved data collection and tax expenditure reports; and limits to fundraising expenditures and remuneration.
Consideration could be given to introducing equivalent tax treatment for domestic and cross-border philanthropy. Requirements could be equivalent to those applicable in the domestic philanthropy context, or additional checks could be required before providing favourable tax status.
