Taxation of NGOs - why the fuss?

Do non-profit/ non-governmental organisations (NGO’s) deserve a special tax regime?  The normal response will be “Of course!”.  Such a reaction would be natural bearing in mind that they normally set out to support good causes for particular groups of persons - in most cases the poor, women, elderly and children, and with the main focus areas including health, education, environment, social and political welfare - and without a profit motive. To achieve the intended purposes, NGO’s require funding and normally this is in the form of contributions and grants that have been derived from other profit-making activities, that would have been taxed already. This is the background to the general expectation that NGO’s should not be subject to taxation.

So why the fuss about taxation of NGOs?  Well, simply put it is because the assumption of an automatic tax free environment for NGOs is mistaken.  Firstly, whilst it is true that in certain cases NGOs will have relief from income tax on the NGO entity itself, and from certain indirect taxes, any such relief is normally subject to conditions.  In addition, certain tax obligations or costs will normally not be exempted - for example, payroll taxes on employees, withholding taxes on suppliers, stamp duty on various legal instruments and indirect taxes on supplies of certain services (for example, telecommunications, electricity).

So far as income tax is concerned, in many cases the law will at a practical level normally result in an NGO not having an income tax liability.  Firstly, in terms of common law for a person to be seen as carrying on a business, it is generally understood that there must be a profit motive - and indeed, this approach was also previously reflected in the income tax legislation, which prior to July 2017 explicitly defined the term “business” to exclude activities that are conducted without a profit motive.  This exclusion was removed in the Finance Act 2007 - and whilst arguably, one could still seek to rely on common law principles to insist on the need for a profit motive, it appears that this change was seeking to make such a motive unnecessary.

So, if at a practical level an NGO is treated as deriving business income (being the funding it receives), how does the law then ensure that the NGO is not taxed on these receipts.  Well, essentially there is a two step process in terms of (i) recognition as a charitable organisation and (ii) minimum annual expenditure on the organisation’s activities.

In Tanzania, NGO’s can apply to be recognised as charitable organisations, subject to written applications filed with the Commissioner of TRA. The predefined criteria include being a resident entity of public character that is established for relief of poverty or distress of the public, advancement of education, or provision of general public health, education, water or road construction or maintenance. An entity of public character is required to have its membership open to the general public or an identifiable group of persons, to operate without profit motive, not to distribute profits generated from its charitable business and to have its profits ploughed back and used solely for the original charitable function.

However, obtaining the charitable status does not amount to income tax exemptions. Instead, when the NGO has met the predefined criteria and has a ruling to be recognised as a charitable organisation, then it will be granted an additional tax deduction equal to 25% of its income. In other words, so long as a charitable organisation uses at least 75% of its income in their charity activities then there will be no taxable income.

Incidentally, even if there is no taxable income this does not negate the requirement to file an income tax return.  In particular, whilst for an individual there is no filing obligation if there is no taxable income, for an entity (i.e. partnership, trust or corporation) this obligation applies whether or not there is taxable income.  Failure by an entity to file an income tax return will automatically result in a late filing penalty (calculated at a monthly rate of TZS 225,000 ).  So, in a word do remember to file the returns even if no tax is payable!

Perhaps the area that can cause the most confusion is in relation to agreements entered into with Government entities, which frequently will include some commitments from the Government in relation to fiscal matters. However, even if these agreements make a commitment to provide beneficial tax treatment, including exemptions, such commitments can only be enforced if they have effect under the relevant tax law (i.e. they have been specified in the law, or in any other case, the procedure to enforce such exemption has been followed).  In practice, therefore there is the need for NGO’s to ensure the office of the Minister for Finance is also involved in the process of negotiating contracts with the other relevant Ministry, so that the exemptions concluded can be gazetted.

Ultimately any NGO that buries their head in the sand, thinking that tax issues are not a primary concern for them are running a risk.  As highlighted, taxation of the NGO sector is much more complicated than many initially assume.  Accordingly, it is not surprising that it does create a fuss!

By Redempta Maira is a Senior Manager, Tax Services at PwC.