LEGAL FRAMEWORKS: DO TAX INCENTIVES AFFECT PRIVATE CONTRIBUTIONS TO NON-PROFIT SECTOR? Ukrainian Citizen Action Network/European Law Advancement Network (Ukraine), June 2008 Acknowledgements to International Center for Not- for-Profit Law and European Foundation Center

Key question: mind average donors  Which taxpayers make charitable contributions to endowments and other foundations?  To what extent will the deduction increase their giving?  To what extent will the deduction complicate tax filing, and will tax evasion increase?

Major options for tax incentives  Unlimited deductions  Deductions up to maximum percentage of taxable income/turnover  Deductions more than a minimum amount  Deductions up to a maximum amount  Percentage laws on giving some of paid tax contributions to certain foundations

Individual donors  Individual charitable giving shows some insensitivity to its tax price, and differ rather in culture and social context terms  Individual donors rarely think the direct government grants to be equal or socially superior option  Percentage laws on giving some of paid tax contributions to certain foundations, however, may be felt as a tax incentive

Individual donors  Whatever are tax rates, income distribution and charitable giving purposes, the top income quintile (20%) use two third, at least, of tax deductions for individual donors  Sensitivity of tax payers with lower income to tax incentives and itemization tend to be uncertain or differ in cultural contexts

Corporate donors  In general, corporate donors are far more sensitive to tax incentives due to their liabilities and reporting to shareholders  Corporate donors tend to use long-term instruments and allowed business expenses in charitable giving, too  Short-term tax incentives tend to have less elasticity than carrying forward deductions

Conclusions on donors  While individual donors make majority of donations, tax price is not a decisive consideration  Individual donors with lower income tend to use tax incentives on case-to-case basis and to avoid long-term instruments  Corporate donors, if no tax incentives, tend to consider their giving as investment

Major options’ implementation  Actually, national tax legal frameworks usually combine two or more of the abovementioned four options of tax incentives for donors in order to decrease budget revenue loss  27 European Union members do show diversity in approaches to tax incentives for donors, while only five countries have no tax incentives for individual donors

Unlimited deductions  In EU, Great Britain and Cyprus grant unlimited deductions for all donors, and Ireland and Portugal for corporate donors  Unlimited deductions cause maximum budget revenue loss, while only small groups of taxpayers do take advantage  However, unlimited deductions are crucial for donations of real estate, land etc., if they may not be carried forward

Deductions up to a maximum amount (cap)  The only type of tax incentive when charitable giving declines more than revenue loss; in EU, they are used in Belgium, Denmark, Finland, Italy and Malta; special cap up to 307,000 euro for donations to endowments in Germany  There are no incentives to give beyond the ceiling under this option  Verifying many small amounts is difficult for tax authorities and increase tax evasion, while keeping records does not encourage smaller contributors to use this deduction

Deductions more than a minimum amount  In EU, seven countries use this deduction, virtually all in combination with maximum percentage of taxable income  Such deductions do not encourage those who could not afford contributions or do not contribute currently  Donors having the lowest and highest income, which have to contribute more than they wish in order to get tax deduction, are strongly critical

Deductions up to a maximum percentage of taxable income  This deduction is most common in EU, though only nine countries do not combine it with other tax limitation  Seven countries allow deductions of % of donations value up to a maximum percentage of individual income, while for companies it can amount to %  At least, four countries allow alternative tax base (turnover, salaries, investments)

Maximum percentage, EU

Conclusions on impacts  Deductions up to a maximum amount are the least effective for private giving; filing is the easiest, but tax evasion is the highest  Deductions more than a minimum amount are usually used for special purposes or beneficiaries; filing is easy, tax evasion is low or medium

Conclusions on impacts  Unlimited deductions tend to increase giving by a smaller group of donors; filing is easy, but high tax evasion and budget revenue loss makes bad public image  Multiple maximum percentage deductions are the most common in EU, filing problems and tax evasion are medium; however, these deductions are usually effective, if combined with carrying forward deductions in future years