Percentage Legislation in Central and Eastern Europe: - a mechanism for philanthropy? Nilda Bullain European Center for Not-for-Profit Law Conference on Corporate Social Responsibility: A New Model of Partnerships 2 July 2008, Tbilisi

© ECNL Central idea of % mechanism Taxpayer decides whether to designate portion of tax paid to entitled organization. * tax allocation * (indirect) government support

© ECNL % laws around the region Historical context  Germany, Spain, Italy The Percentage Group  the inventor: Hungary (1996)  Slovakia (2001)  Lithuania (2002)  Poland (2003)  Romania (2003) Initiatives: Czech Republic, Ukraine, Armenia Abandoned idea: Georgia, Macedonia

© ECNL Issues to be considered Who can designate? How much? To how many? To whom, what are the criteria? How? When? What for? Reporting, accountability? Invalid designations? Dispute settlement…

© ECNL Who ? (taxpayers) How much? To how many recipients? HUindividuals1 +1%1+1 SKindividuals & companies 2% * 2% 1 - many Litindividuals2%many PLindividuals2%many ROindividuals2%1

© ECNL Recipients To whom?  All qualifying NGOs (HU, SK – registered on list)  PBOs (Lit, PL)  Church/state objective, public institutions Other criteria:  Prior existence, pre-registration, PB purposes, public debt, territory What are resources used for?  Mainly unrestricted funds

© ECNL And how? Through Tax Returns Directly on account of beneficiary (Poland) – proved ineffective so amended Reporting/Accountability Issues to be considered:  Administrative burden (time +money)  Anonymity  Directly or through employers

© ECNL Legal nature and effects of the percentage mechanism Tax allocation mechanism Citizens control tax spending directly Indirect government support Beneficiaries (NGOs) have access to increased resources Transitional philanthropy Encourages philanthropic activity MULTIFUNCTIONAL!

© ECNL Policy rationales for the 1% law Taxation self-determination  a tool to strengthen democratic system and values (taxpayer control of public spending) Civil society development  Increasing resources of the sector  Raising awareness in the general public  Strengthening communication skills and outreach

© ECNL Rationales for the 1% law Developing a philanthropic culture  “first step” of making people think why they would want to support an NGO Government outsourcing  decentralized and de-politicized government support to activities that benefit the public

© ECNL Potential impact of the 1% law Policy rationalePotential for success Taxation self- determination Good (with some limitations) Civil society development High (but much depends on implementation) Development of philanthropy Questionable (likely but so far no visible impact) Government outsourcing Low (not appropriate mechanism)

© ECNL The advantages… NGOs  Linking to community;  NGO communication skills;  Awareness about civil society issues;  Pool of resources for unrestricted funds;  A revenue for local/small NGOs;  Higher potential for bigger NGOs;  Market based - healthy competition;

© ECNL The advantages, cont’d. Taxpayers  Decision on how % of public money is spent;  Awareness about how public money is spent;  Awareness about civil society issues and why to support. State  Decentralized/de-politicized government support;  Probably not costly;  To “sweeten bitter pill of taxation” ;  NGOs give part back through taxes.

© ECNL Objectives revisited: Resources? Hungary Around 35-40% of taxpayers; 0.8% of sector revenue; Around 43% of NGOs receive (and bigger NGOs). In 2005: 6.9 billion Fts. Slovakia 1 st year 34% of taxpayers; 2 nd : 42% (i), 75%(c). In 2006: USD (individuals), USD (corporations) 21% of all NGOs, or 99.8% of all eligible Poland: 3.6% from tax payers; In 2005: 22,038,733 USD. around 8% of all NGOs are eligible, no data how many received

© ECNL Objectives revisited: Philanthropic Culture? Unidentified effect on traditional philanthropy; Lithuania and Slovakia: abolished tax incentives; Anonymity of declarations a problem.

© ECNL T he challenges Is it a just mechanism?  Who can give, who can receive (competition w others)?  Limited resource: % of the cake always the same. How much you invest, how much you get?  Administration, complexity vs. resources. Is it creating “classes” of NGOs? Is it enhancing, delaying or substituting development of philanthropic culture?  Anonymity, donor reflex. What is the effect on other tax incentives?

© ECNL So is it a form of philanthropy? A classic definition of philanthropy: Voluntary private giving for public purposes. Percentage idea: Taxpayer decides … to designate % of tax paid to organization. “TRANSITIONAL OR GENETICALLY MODIFIED PHILANTHROPY”

© ECNL An incentive for philanthropy? Incentives for philanthropy:  Usually tax deductions and tax credits.  Tax incentive involves an economic benefit to the taxpayer.  Novel forms: government aided philanthropy, such as the Gift Aid system in the UK. No economic consequence to the donor (+/-). Government encourages private giving by increasing the value of the gift from public budget.

© ECNL An incentive for philanthropy? Percentage designation not an incentive for philanthropy in the “law dictionary” sense. However, may be considered an “incentive” in the broad understanding of the word:  The opportunity itself encourages people to act (direct resources to NGOs).

© ECNL And a mechanism for philanthropy? Has the potential in transitional societies… But if to be adopted, should be based on:  analysis of third sector  analysis of existing legal incentives  analysis of current philanthropic culture  careful review and selection of implementation options  cross-sectoral cooperation in drafting And it should be implemented in combination with traditional incentives!

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