Ministry of Economic Development proposes to encourage sponsors - legal entities
Ministry of Economic Development of Russia proposes to attract domestic sponsors by introducing new provisions to the tax code, which could allow the taxpayers to deduct the cost of charity (for the funds transferred for charity, religious and socially-oriented non-profit organizations) fr om income tax liabilities up to 10% of their profit before tax1.
At first glance, this proposal might reduce the tax burden on the sponsors, and thus provide incentives for the development of charity activity on the part of legal entities. However, if we consider the proposal in the context of Russian reality, it may happen to be useless for this challenge and even harmful in view of the general institutional environment.
The effective Russian tax legislation allows the deduction of expenses for charity to physical persons, rather than legal entities. The social tax refund amount for the personal income tax in accordance with Sub-Item 1, Item 1, Art. 219 of the Tax Code was continuously expanding. Thus, since January 1, 2012 the provision on tax deduction for the charity expenses (within the amount of 25% of individual taxable income) was from the terms, under which non-profit organizations - assets recipients should be funded by the budget partially or in full, while the list of non-profit organizations, in whose favor the donations are addressed, including the formation and replenishment of the endowment.
In this regard, ability of organizations to deduct their expenses for charity can be considered as a step towards creation of equal conditions to physical and legal entities, i.e., to neutralization thereof, but it is not true in terms of the income tax structure. The final payers of income/profit taxes are always physical persons, while at the corporate level, income of shareholders that has not been paid to them, that is, reinvested, is subject to tax. Therefore, in the assessment of corporate income tax all necessary business expenses (economically reasonable, aimed at income generating) should be deducted, but not socially-oriented expenses 2.
Costs of an individual entity (as the final payer of income tax) for charity can be considered as a contribution to social needs, whereas non-profit organizations, in whose favor the costs are usually addressed to cover the gaps in social services provided by the state, and thus the tax refund for such purposes is justified in some way. The provision of such a deduction at the organizational level, in fact, means doubling of the tax benefit for their shareholders (they can deduct the charity costs as at the organizational level, and as individuals), which can be justified, in particular, by administrative considerations.
In the Russian context administrative considerations are on the contrary, proving against the introduction of proposed tax benefits for organizations, and it is not the issue of reducing tax revenue (any benefit involves some lost revenue), but rather the growth of opportunities for tax evasion in violation of the basic principles of civil law. According to Item 4 of Art. 575 of the Civil Code, donation in the relationship between commercial organizations is expressly prohibited, while commercial organizations can create non-profit organizations, including charity funds. The commercial organization assets transfer to the fund established by another business entity does not violate the civil law, only if the organization – founder of the fund and / or its employees and their family members cannot benefit from the use of the fund assets. In practice this provision is not observed in Russia.
If the barrier between a commercial company and its incorporated non-profit, including public organization is insufficiently rigid, control over its activity is complicated, and in case monitoring is irregular and the penalty for incompliance is insignificant, the introduction of a deduction for charity from the tax base of legal entities will not encourage donations, but rather urge to disguise ordinary transactions between commercial organizations as a donation, which can make business environment in Russia is even less transparent.
As for the actual task of sponsors - legal entities involvement in donations, in Russia, in contrast, for example to the USA, wh ere 80% of donations are made by individuals, the major part of charitable contributions are made by large corporations and medium biznesses3. Therefore, it seems that the objective of donations encouragement in our country should be addressed not only through the provision of additional tax incentives, but through the creation of clear, transparent and sustainable environment for the non-profit organizations, including the responsibility for the illegal actions of their management. This will enhance the confidence of donors in good faith that the funds their funds will be used exactly for the dedicated purpose, which would be attractive to them. There is no reason to encourage the organizations involved in charitable activity, by economic measures as a "voluntary-compulsory social responsibility".
At the same time, in view of recent trends in legal regulations in regard to non-profit organizations (the introduction of the "foreign agent" status instead of withdrawal of the Government approval of the closed list of sponsors, whose donations are not taxable at the recipient organization) creating normal conditions for the NGOs functioning is a political issue.
N.A. Malinina, Head of Tax Policy Department
1 Ref.: editorial note: To assist the donors / / Vedomosti. 2012. No. 149 (3163).
2 Of course, if such expenses are not, in fact, included in the payroll. In the latter case they are taxable from the employees under common procedure.
3 According to the Russian Union of Industrialists and Entrepreneurs. Ref.: editorial note: To assist the donors / / Vedomosti. 2012. No. 149 (3163).
The effective Russian tax legislation allows the deduction of expenses for charity to physical persons, rather than legal entities. The social tax refund amount for the personal income tax in accordance with Sub-Item 1, Item 1, Art. 219 of the Tax Code was continuously expanding. Thus, since January 1, 2012 the provision on tax deduction for the charity expenses (within the amount of 25% of individual taxable income) was from the terms, under which non-profit organizations - assets recipients should be funded by the budget partially or in full, while the list of non-profit organizations, in whose favor the donations are addressed, including the formation and replenishment of the endowment.
In this regard, ability of organizations to deduct their expenses for charity can be considered as a step towards creation of equal conditions to physical and legal entities, i.e., to neutralization thereof, but it is not true in terms of the income tax structure. The final payers of income/profit taxes are always physical persons, while at the corporate level, income of shareholders that has not been paid to them, that is, reinvested, is subject to tax. Therefore, in the assessment of corporate income tax all necessary business expenses (economically reasonable, aimed at income generating) should be deducted, but not socially-oriented expenses 2.
Costs of an individual entity (as the final payer of income tax) for charity can be considered as a contribution to social needs, whereas non-profit organizations, in whose favor the costs are usually addressed to cover the gaps in social services provided by the state, and thus the tax refund for such purposes is justified in some way. The provision of such a deduction at the organizational level, in fact, means doubling of the tax benefit for their shareholders (they can deduct the charity costs as at the organizational level, and as individuals), which can be justified, in particular, by administrative considerations.
In the Russian context administrative considerations are on the contrary, proving against the introduction of proposed tax benefits for organizations, and it is not the issue of reducing tax revenue (any benefit involves some lost revenue), but rather the growth of opportunities for tax evasion in violation of the basic principles of civil law. According to Item 4 of Art. 575 of the Civil Code, donation in the relationship between commercial organizations is expressly prohibited, while commercial organizations can create non-profit organizations, including charity funds. The commercial organization assets transfer to the fund established by another business entity does not violate the civil law, only if the organization – founder of the fund and / or its employees and their family members cannot benefit from the use of the fund assets. In practice this provision is not observed in Russia.
If the barrier between a commercial company and its incorporated non-profit, including public organization is insufficiently rigid, control over its activity is complicated, and in case monitoring is irregular and the penalty for incompliance is insignificant, the introduction of a deduction for charity from the tax base of legal entities will not encourage donations, but rather urge to disguise ordinary transactions between commercial organizations as a donation, which can make business environment in Russia is even less transparent.
As for the actual task of sponsors - legal entities involvement in donations, in Russia, in contrast, for example to the USA, wh ere 80% of donations are made by individuals, the major part of charitable contributions are made by large corporations and medium biznesses3. Therefore, it seems that the objective of donations encouragement in our country should be addressed not only through the provision of additional tax incentives, but through the creation of clear, transparent and sustainable environment for the non-profit organizations, including the responsibility for the illegal actions of their management. This will enhance the confidence of donors in good faith that the funds their funds will be used exactly for the dedicated purpose, which would be attractive to them. There is no reason to encourage the organizations involved in charitable activity, by economic measures as a "voluntary-compulsory social responsibility".
At the same time, in view of recent trends in legal regulations in regard to non-profit organizations (the introduction of the "foreign agent" status instead of withdrawal of the Government approval of the closed list of sponsors, whose donations are not taxable at the recipient organization) creating normal conditions for the NGOs functioning is a political issue.
N.A. Malinina, Head of Tax Policy Department
1 Ref.: editorial note: To assist the donors / / Vedomosti. 2012. No. 149 (3163).
2 Of course, if such expenses are not, in fact, included in the payroll. In the latter case they are taxable from the employees under common procedure.
3 According to the Russian Union of Industrialists and Entrepreneurs. Ref.: editorial note: To assist the donors / / Vedomosti. 2012. No. 149 (3163).