Around the world, the third sector has become a force to be reckoned with. The greater the economic, political and social development of a country, the greater the recognition and importance of not-for-profit organizations in its civil society. Such organizations assist, complement, and sometimes even replace the state in carrying out work in the public interest. The origin and evolution of these entities are the product of the population’s constant and growing lack of confidence in the State’s capacity or responsibility in solving, on its own, varied and important matters of general public interest, ranging from social questions to matters of health, political organization, and the environment.
In dealing with these challenges, the third sector has increasingly taken on the role of strategic mediator in the dialogue between the private sector and the public administration. It raises funds, monitors the use of public property and finances, and carries out social projects. It is a worldwide phenomenon, since human needs do not recognize political borders. This has never been more evident than in the current covid-19 pandemic, with its health, economic and social dimensions, which took less than six months to sweep the planet.
Although the development of third sector entities can be said to be a natural and even foreseeable phenomenon, the state can and should help the movement by removing legal and bureaucratic obstacles or adopting measures to promote philanthropy. It is no surprise that all over the world, countries make use of specific public policies to facilitate and encourage the work of these not-for-profit entities, including tax policies. Since such entities do not distribute profits, any taxes levied on them necessarily must be paid out of their assets. Excluding them from taxation is thus fundamental.
Countries like England, France and Argentina do not tax the income or surplus of not-for-profit entities, and do not levy consumption taxes on their activities. In the same spirit, Chile and the United States permit broad deductibility of donations to fund such entities, especial in 2020.
And what is the situation here in Brazil, a country that has never depended more on civil society to help cure the historic delay in its economic and – above all – social development?
Brazil’s 1988 Constitution did well to exempt notfor- profit education and social assistance entities from taxes on property, income and services, but that is not enough. Many federal, state, and municipal laws have gone further, granting additional tax exemptions for philanthropic entities and initiatives that do not fall within the rules established in the Constitution. Even so, the complexity of the Brazilian tax system and the tax authorities’ desire to raise funds have imposed burdens and bureaucracy that, contrary to the best examples internationally, hinder the development of the third sector. In most Brazilian states, exemptions from gift tax for donations to fund third sector entities are still insufficient, while rules under income tax legislation on the deductibility of expenses incurred in donations to not-for-profit civil organizations are timid and limited.
As a rule – and not an exception – Brazilian states charge the value-added tax, ICMS, on donations of goods by manufacturers and commercial businesses. To illustrate this sad reality, a specific, exceptional rule, Confaz Agreement 81 (September 2, 2020), had to be created to ensure that ICMS would not attach to donations of equipment and other material to prevent and combat covid-19 made to the Superior Electoral Court and the various divisions of the electoral courts for use in the upcoming municipal elections. And even then, in issuing regulations on the exemption, some states, such as Bahia, limited its application by requiring donors to refund tax credits, which increased the cost of the donations. If obstacles of this kind can be found in donations to the government itself, can anything better be expected when the recipient of donations is a non-governmental entity?
The year 2020 opened with the promise of a long-awaited tax reform, structured around pillars like simplification of tax rules and reduced litigation. Unhappily, for the third sector, these promises were not realized.
The main bills under debate, proposed constitutional amendments 45 and 110 to create a goods and services tax, the IBS (Imposto sobre Bens e Serviços), and the government bill to create a contribution on goods and services, the CBS (Contribuição sobre Bens e Serviços) focus on eliminating “tax benefits”, which would include exemptions for third sector entities. The proposed reforms thus treat exemptions for third sector entities as if they were a privilege, ignoring the reality that the entities already bear part of the State’s burden in areas that it has failed to care for, or simply does not wish to care for.
At least to date, none of these proposals provide for exemptions or incentives for donations in the form of tax credits or deductions from taxes. It looks, in fact, as if the current policy of taxing donations in goods will continue, making them subject to taxes, including consumption taxes. There is a risk, moreover, that the tax burden on the third sector will be increased by a new tax, the CBS, at the exorbitant rate of 12% on the income of not-for-profit civil society organizations. This approach is perturbing and stands in stark contrast to the private sector’s attitude, which has donated billions in 2020 to fight the covid-19 pandemic, even though the deductibility of the donations is uncertain.
The good news is that the proposed tax reforms are still in the early stages, and none has been approved so far. That means that adjustments and amendments can still be made in response to criticism from the various sectors of society, each of which understands its own difficulties best. Changes should be made to exempt notfor-profit entities and their supporting and core activities, and to ensure incentives for donors and users of third sector services. We cannot afford to miss this opportunity to support philanthropy.
If we fail to act, the proposed reforms, as currently written, will result in an increase in the taxation of philanthropy in Brazil, contrary to every expectation. Whatever the shape of the tax reform finally approved, it must reflect the principle that “philanthropy is not a taxable activity.”
Where is the tax reform for the third sector?
Authors:
FDB
Franciny de Barros
ARTICLE23 December 2020