OECD warns of dangers of over-generous tax relief for philanthropy

The report, written in collaboration with the Geneva Centre for Philanthropy, notes that the non-profit sector has a significant impact in many countries, sometimes representing as much as 5 per cent of gross domestic product.

However, it says there are concerns in some countries about the rising number of very large private philanthropic foundations established by ultra-high-net-worth individuals (UHNWIs) who, it says, ‘may gain a disproportionate influence over how public resources are allocated.’ These UHNWIs are sometimes able to channel substantial resources into the priorities of their choice, while ‘significantly minimising their tax liabilities,’ says the OECD.

The report discusses various tax policy options to reduce the risk of abuse, including reassessing the charitable activities eligible for tax support to limit favourable treatment to areas consistent with government policy.

It suggests that policy makers offer tax credits and fiscal caps rather than deductions, to ensure that tax support does not disproportionately benefit higher income taxpayers.

Other options suggested by the OECD include:

• cutting back tax exemptions for commercial income of philanthropic entities, to minimise the risk of putting for-profit businesses at a competitive disadvantage;
• improving oversight and transparency of philanthropic foundations, to ensure that tax concessions are not abused through tax avoidance and evasion schemes, and to improve public trust in the sector. This could be done by setting up public registers of approved philanthropic entities, with annual reporting, differentiating between donating and sponsoring, and publishing tax expenditure data; and
• reassessing restrictions currently imposed on cross-border philanthropic activity. Beyond the European Union, most countries do not provide tax relief for foreign philanthropic entities operating domestically, says the OECD.

Commenting on the report, the OECD's Centre for Tax Policy and Administration Director Pascal Saint-Amans said: ‘While there is a case for providing tax support for philanthropy, the fiscal pressures that governments are facing, especially in the context of the COVID-19 crisis, mean that it is even more crucial that this support is directed to where it is needed most.’

Sources

• OECD
• OECD (blog)
• OECD (report summary)