Appetite to further analyse the rationale and efficiency of tax incentives for philanthropy
When commenting on the ERNOP Science and Society Seminar presentation of Giedre Lidelkyte Huber (Geneva Centre for Philanthropy) of key findings from the recent in-depth OECD report, I very much enjoyed the part of the conversation around the rationale for tax incentives and arguments against and in favour of tax incentives, which triggered appetite for further reflection and analysis. Philanthropy’s contribution to the public benefit and the fact that governments give up some of their revenue to acknowledge this fact got stressed. Looking at corporate income tax exemption for philanthropic organisations, the surplus that these entities generate is different in nature from those generated by for profit entities and should hence not be taxed. Does this argument really hold? Counter arguments were also presented such as the fact that tax incentives to philanthropic actors could create unfair competition (or even in conflict with State Aid rules where public benefit organisations (?) engage in economic activities), being costly to the state budgets and not even frequently used by tax payers.
Clearly, tax incentives want to stimulate more giving and the creation of more public benefit work, but do they actually deliver the desired increase? Research on the matter suggests that they are not the only decisive factor for a donor to consider but that they do encourage donors to give. With regard to the question of tax incentives being a cost or a benefit to the state budget, I referred to a recent study undertaken by PwC and SwissFoundations that argues that tax incentives are not a burden to the state budget but rather a benefit to society. Again, more analysis in different country contexts could be interesting.
Governments seem to use the tax law as a way to stimulate more investments and activities into certain policy areas. The question as to whether tax incentives also influence the way philanthropic organisations operate (?) will also need further analysis.
The OECD report and our own data gathering reveal that while details of national tax laws differ, commonalities can be identified on the key areas and core criteria for the public benefit tax exempt status of legal entities. For example, pursuing exclusively a public benefit purpose and following a non-distribution constraint/usage of the assets for the public benefit purpose as well as benefiting the public at large. When it comes to the tax treatment of cross-border scenarios, one has to distinguish between EU and non-EU countries. Outside of the EU, tax incentives are often restricted to domestic scenarios and , double tax treaties do not generally include a clause on public benefit organisations or giving. Here the OECD Model Tax Treaty could potentially be amended to consider this.
The situation in the EU is different, since important decisions of the European Court of Justice developed the general non-discrimination principle, implying that public benefit organisations and their donors (be they individual or corporate donors) acting across borders within the EU are entitled to the same tax incentives as would apply in a wholly domestic scenario. However, as I pointed out during the conversation, while the court rulings have created a wave of national tax law revisions, it is unacceptable that barriers continue to exist. The 2014 joint EFC-TGE study, ‘Taxation of cross-border philanthropy in Europe after Persche and Stauffer – From landlock to free movement?’, the 2017 EFC/TGE study as well as our 2020 follow-up legal research in 40 EU and non-EU countries, outlining how several Member States have not yet removed this discrimination – and even where they have, practical or legal problems persist.
An opportune moment to mention, then, that European Philanthropy infrastructure has been calling for a single market for philanthropy and public good and has made proposals to overcome barriers to cross-border philanthropy embedded in the wider European Philanthropy Manifesto.