Issue 6, 2013. December-January

   

FANTASY AND FACTS: GEORGIAN CHARITY ORGANIZATIONS

The lack of information and education about the tax laws and their implications for non-profit organizations in Georgia is hampering the development of philanthropy in the country.

Ruta Casablanca and
Nino Lomidze


Civil society organizations have a critical role in a democratic society: they provide a voice to vulnerable populations, to those who have little or no access to decision-makers, experts, and politicians. These organizations often provide critical social services not otherwise available.

They also fight for transparency between the public and their government. However, most NGOs struggle to survive, especially in developing countries where they depend on international funding and where a culture of philanthropy is weak.

In addition, a lack of information and understanding about existing services and benefits for non-governmental organizations (NGOs) and non-profits in Georgia is hampering activities. Without proper access to information, charities are not able to make educated decisions about their activities.

For instance, McLain Association for Children (MAC) was offered fifty wheelchairs in the US but declined the donation believing that they would have to pay a 20% customs tariff duty on the wheelchairs that they could not afford. According to Vazha Salamadze, director of Civil Society Institute (CSI), there is a mechanism to bring in-kind contributions to Georgia without paying the customs tariff. What MAC needs to do is have the wheelchairs donated to a non-profit in the US which can then make an in-kind contribution to an NGO in Georgia. This grant agreement should be presented to the Ministry of Finance, which will issue the appropriate document to void customs tariffs. This information is not readily accessible to a small NGO in Georgia such as MAC.

Although NGOs such as CSI and the Consulting and Training Center (CTC) are important resources for information, their services are not widely known or accessible, especially in the smaller cities and villages of Georgia. CSI recently held trainings on the Tax Code for financiers and lawyers of CSOs in Tbilisi, as well as major cities throughout Georgia. It published a guide, "Financial Registration and Accounting of Not-for-profit Legal Entities,"available on its website in Georgian (www.civilin.org). MAC was not aware of this training or the guide.

NGO Status vs. Charity Organization Status: Benefits vs. Difficulty

While most charity-oriented NGOs would like to have charity status, as it provides tax relief for everyday expenses and humanitarian aid (for example, NGOs with charity status can bring goods from overseas without paying taxes), the lack of information and education about the tax law and its implications are, once again, an issue.

Another issue is the perception among directors of small NGOs that, while applying for charity status, their NGO records will be finely reviewed by the Ministry of Finance and that they can be penalized by any unintentional mistakes. Other NGOs avoid charity status because of extra expenses needed for providing records.

According to Salamadze, it is not difficult to obtain charity status for a NGO, but the benefits are limited. The primary benefit is that a business, which donates to the charity, can get a tax benefit of up to 10% of their tax liability. But the culture of corporate social responsibility is poorly developed in Georgia and NGOs do not often solicit funds from businesses. Other benefits include the ability to make scholarships to socially vulnerable populations without tax implications for the recipient, although rules do apply. Also an organization with charity status does not pay VAT on purchases, whereas a NGO must pay the VAT and then apply to the Ministry of Finance to get reimbursed. If the NGO purchased materials for a grant and they receive the reimbursement after the grant is completed, the reimbursement becomes income and the NGO must then pay tax on it. Salamadze also stated that an NGO must be in existence for one year, file an application with the Ministry of Finance, and include their registration documents and an audited financial statement to receive charity status. The Ministry of Finance has 30 days to reply and if no reply is received, the NGO automatically receives charity status. Afterward, the charity must file an annual report with an audited financial statement with the Ministry of Finance each year.

MAC's experience: MAC's accountant went on the Ministry of Finance's web site, but found the instructions were not clear, requiring a trip to the Ministry of Finance to get the correct information. The lack of simple, straightforward procedures makes it difficult for charities to work - and makes it more difficult to ensure their clients receive the maximum benefits of their aid. For example, MAC is supporting and encouraging students from small cities and villages to attend universities or technical schools through a scholarship program for poor and socially vulnerable young people. But there was a question as to whether or not the young recipient is then required to pay a 20% tax on the money received. According to Archil Tsertsvadze, Legal Expert for CSI, the tax regulations state that a NGO can make a grant to an individual for educational purposes, which would not encumber the student with a tax liability. Therefore, MAC can support these students within the law by making grants to them - an easy solution, once discovered.

Tax Incentives to Encourage Philanthropy in Georgia

Many countries, including the US, Great Britain, and other western European countries provide tax incentives for individuals to give to charitable organizations in their countries. This approach can help create a strong culture of philanthropy. In the June 2012, The Economist reported that high tax breaks in the United States have inspired Americans to give.

"America has the most generous tax incentives for charity, and has the highest giving as a proportion of GDP, at 1.67%, according to a rare comparative study by Britain's Charities Aid Foundation," the article reports. "Britain's tax breaks for charity are the next-most-generous, and it had the second-highest share of charity to GDP, 0.73%, followed by Australia, 0.69%, which also has significant tax breaks. By contrast, the relatively weakly incentivized Germans give only 0.22% of GDP."

However, because Georgia has a flat tax, tax deductions would not provide as big an incentive as in the US or Great Britain.

Therefore, one option local NGOs are pursuing is the "one-percent law" which has been adopted by several Central and Eastern European countries such as Hungary, Poland, Lithuania, Slovakia and Romania.

Nilda Bullain of the International Center for Nonprofit Law (ICNL) analyzed the history, benefits and challenges to this form of support to NGOs in her article "Explaining Percentage Philanthropy: Legal Nature, Rationales, Impacts."

Basically the law states that one percent of personal income tax of taxpaying physical persons can be transferred to the state for social purposes (and the church), or designated to a specific NGO. Any NGO can then apply to this fund. However, in Slovakia and Poland, which adopted "percentage legislation" based on the Hungarian example, the church is not a permissible beneficiary, except in the form of NGOs established by the church.

Recommendations

Although applying for charity status is relatively simple, it does require filing with the Ministry of Finance and filing yearly reports. The instructions on its website are not very clear. In addition, it is difficult for small organizations to find out what the regulations are, what they mean, and what changes are being proposed. Therefore, one recommendation would be to have a NGO Resource Center which would provide one-stop shopping, where all relevant information, legislation, and initiatives could be found, including specific instructions on applying for charity status, and its benefits and obligations. This would be especially helpful in the regions and small towns where the smaller NGOs have very limited access to the information they need to do business in Georgia.

In addition, if the government agrees to develop percentage legislation to encourage philanthropy there is a concern that in Georgia the funds would predominantly go to the Georgian Orthodox Church and the various philanthropies would spend an inordinate amount of their funds and energy marketing their NGOs to access these funds. Since that could ultimately harm organizations that are not directly connected to the church but do valuable work, we recommend any law on donations take those cultural issues into consideration.

Ruta Casablanca and Nino Lomidze are project managers for McLain Association for Children (MAC)