Q & A: NGO and income tax – present and future possible solutions

A possible solution – exemption from taxation for realizing statutory objectives

We asked Mrs. Dushica Kostovska – Jakovchevska from the Tax Policy and Administration Sector in the Ministry of Finance of the Republic of Macedonia if the civic organizations’ income should be taxed as it is being done, or some more favourable solutions should be found. This is her answer:
“NGOs’ income taxation is not possible and it should not be considered only from an aspect of the domestic regulations, but it is necessary to study other countries’ innovative practice, whose solutions give a guarantee for progress in this part.

Present solution – basic characteristic of the tax treatment in the NGOs in Macedonia is its taxation, which does not differ from the taxation of the other legal entities. However, in spite of the general unfavourable tax treatment, as a result of the need to open the process of improving, certain tax benefits should be stated, relevant for the NGOs:

1.      In the Law for income tax (“Official gazette of the Republic of Macedonia”, issues 80/93, 33/95, 43/95, 71/96, 5/97, 28/98, 11/2001, 2/2002 and 44/2002), by reconciling the incomes, collected funds are exempted from taxation, those of earmarked character and which are allocated in the same amount for a certain purpose (sponsorships, donations and other help, memberships and other means that are not aimed at carrying out the activity and whose only function is collecting and allocating for the purpose). A condition for using this tax exemption is the approved funds to be used according to the brought decision, a financial plan and a program for the way, procedures and deadlines of their use. It is also necessary to present appropriate proofs for using strictly earmarked funds.

2.      For those who give donations and sponsorships for scientific, humanitarian, cultural, educational, health, religious and sports objectives, except for the expenses for a professional sport, the costs done on this basis have a treatment of accepted expenditure of 3% of the total income, only if they are paid for the benefit of public institutions that are financed by the budget or to the Red Cross of the Republic of Macedonia. 

Future solutions – Prof. D-r V. Pendovska has a right to notice the following: “the reason for the inappropriate tax treatment of non-profitable organizations (NPO) could be the fact that the tax reform in the field of income taxation was finished five years ago before the ZZGF was put into force. The non-existence of a clear legislative profile of NPO in all relevant aspects has disabled the legislator to issue fiscal initiatives with the tax laws, enough detailed and consistently.” (Ministry of Finance “Bulletin”, issue 12/200, p.45)
The review of the tax laws which influence the non-governmental organizations in Central and Eastern Europe (MCIC issue, 2002) enables us to realize their solutions and to choose the ones that we could implement into our legislation. 

a)      Future solutions for taxation of the income from the NGOs’ economic activities
The taxation of the income from the NGOs carrying out economic activities is current, regardless of the practical ban in the Law for Civic Associations and Foundations.

The best solution would be the gain of up to Euro 10,000, not related to realizing the NGOs statutory objectives and realized by carrying out economic activities, to be exempted from paying a tax. The incomes from carrying out the NGOs statutory objectives that are used for realizing them are not a part of this census; they are exempted from the income tax.

According to the stated, all economic activities that are related to realizing the NGOs statutory objectives are exempted from the income tax, for example, the income realized from the sale of “white walking sticks” is exempted for the NGO in whose statute it is stated that it realizes care for the blind people. A NGO will be exempted for the income of up to Euro 10,000, realized by carrying out economic activities that are not related at all to the statutory objectives, but if the amount of profit is higher than Euro 10,000, then it is taxed by the income tax.

b)      Future solutions for the tax relief for the NGO donors
Almost all the countries have introduced an administrative obligation: Reporting on the given donations (monthly reporting or reporting on longer periods, leaving out the periods when legal entities have not donated).

Most often, donations given to the NGOs and the public institutions from the field of health, education, culture, social care, science and sports, are exempted from the income tax.

The NGOs carry out the activities that in their absence should be carried out by the state. If the donations are taxed, it means that the state will collect funds only in an appropriate amount of the tax rate and only in that amount it can finance these needs. If the donations are not taxed, then the total amount of the donation will be aimed at financing these needs.”