Tax incentives for non-profit organizations

Pahala Nainggolan, Jakarta

In the draft of new tax bill, the government introduced a long- awaited policy that allows taxpayers to record their donations as deductible expenses. Donations given for national catastrophes and for community and social development will be accounted for as expenses from a tax point of view. Thus the more donations that one gives will be that much less tax paid. Currently, donations for social activities are treated as non-tax deductible expenses. It means that for each donation, on top of it, 30 percent must be added for government as a tax payment. This discourages people's charity and social solidarity.

Tax incentives have been eagerly awaited for a long time by both the private sector and community groups (represented by non- profit organizations). For private sector companies and individuals, incentives will give a clear regulation for their corporate social responsibilities (CSR) programs. Currently, they have to give justification for their donations as a marketing expense to improve their image.

Non-profit organizations (NGOs) will also welcome these incentives, as they will enable them to raise more funds from local sources. Approximately 95 percent of them depend on international funding.

Hesitation by the Ministry of Finance to give the incentives were understandable. The state budget relies heavily on tax revenue. Tax incentives will reduce that revenue, thus it must be selectively given. Incentives could be given only when the non- monetary benefits gained is greater than the revenue lost.

Another reason for their hesitation is the unclear status of social work organizations in Indonesia. Non-profit or philanthropic groups are still in need of new regulations, which makes the government concerned about introducing the scheme. There is an opportunity for incentives to be used by taxpayers only to reduce their tax by shifting the money to a relative's NGO or political party, under the guise of social work.

Social work foundations, which are legal entities, are often used as a "vehicle" to do business without paying taxes. The executives of these foundations argue that they are a non-profit organization, so there is no tax liability, and yet they do business as other for-profit organizations do. It creates unfair business competition.

The crucial point is not about giving the incentives or not. It is how to ensure that the money is channeled to the right institution with the right people in it, right programs and activities, as well as good impacts for the communities. Therefore, some actions must be taken such as:

First, a certification program is needed for recipients of donations. There should be a list of certified groups, which would be regularly developed, disseminated and updated. Development of the list will involve a set of criteria for determination of eligibility. Financial and program transparency are also required.

Recipients of donations must be able to show a transparent source of funding, the people involved there and how they use the money. These could be seen from their audited financial reports, for at least 2 (two) consecutive years. In addition to that, they must also show what they did for the community and its impact. To enhance the quality, the impact must be measured by external evaluators instead of their internal reporting.

The certification program should be run voluntarily. Potential recipients of donations could ask for a tax assessment once they feel ready. The results would then be announced publicly. Evaluation of any certified institutions must be made regularly to ensure their performance. A blacklist should also be available for those who steal taxpayer's money. These are institutions that receive donations, but do not publicize their financial and program results. The list should include all the people who established and managed such institutions.

We could learn from the Philippines, which has been running a similar program for two year. They apply a self-regulated certification where certificates are issued by an NGO association.

The list of certified institutions could also be used by foreign donor agencies as it will help them to identify with whom they should award their grant money or work with. On the other side, NGOs are also pushed to implement transparency and accountability. Otherwise they could not access donor's money.

Second, the Ministry of Finance should establish a list of high-priority programs that need to be addressed using donated money. In other words, donations given for things other than these programs could not be treated as tax deductible. By limiting the number of such programs, the impact of funds mobilized could be seen due to a significant amount of money.

Third, they need to set the maximum percentage on donations. Taxpayers have long been disappointed in how the government spends their money. If donations are allowed without any limit, then people would tend to take over the government's role in solving current problems. They will donate as much money as possible for the purpose of community development. And that will endanger the state budget revenue.

Fourth, they must establish a multiple stakeholders agency, which represents the interests of taxpayers, the directorate general of tax and community development players, such as foundations and NGOs who work at the grassroots level.

Tax incentives for donations will bring about multiple impacts. Taxpayers do not have to waste their time trying to give the impression that their donations (not tax deduction expenses) actually are a marketing expense (tax deductible). This will close the window for gray areas, which some tax auditors could use to their benefit.

The scheme will enable non-profit organizations to receive funds from domestics donors and not just from foreign donors. While its requirements will increase the natural selection process where only those who have a real commitment for community and social work will exist. Donor agencies also will benefit. The list of eligible institutions will make it easier for them to select their partners or grantees.

The writer, formerly a tax auditor, is a doctoral student in management science at the school of economics, University of Indonesia. He can be reached at pahala@tifafoundation.org.