International Conference on Public Financing of NGOs

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International Conference on Public Financing of
NGOs
Tax exemptions and other incentives to
encourage CSO economic activities The situation
of Romania in a regional context Eva Varga
Ana Negrila, NESsT Bucharest, September 14
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NESsT mission

• NESsT works to solve critical social problems
  in emerging market countries by developing and
  supporting social enterprises that strengthen
  civil society organizations financial
  sustainability and maximize their social impact.

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NESsT initiatives

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NESsT University
NESsT Venture Fund
Promoting accountability, innovation, leadership
and professionalism in the field
Philanthropic investment funds supporting social
enterprise portfolios in emerging markets.
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NESsT Marketplace
NESsT Consulting
Providing professional services in social
enterprise development
A global on-line shopping directory of social
enterprise products services
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Setting the scene in Central Europe

• Comparison of tax regulations
• in 6 countries Romania, Hungary, Slovakia,
  Czech Republic, Croatia and Poland
• re VAT, profit tax and indirect incentives (tax
  incentives provided to third parties on their
  donations or investment into CSOs)
• Main issues and challenges
• Unfair competition vis-à-vis for-profit sector?
• Caps can be counter-productive
• Administration, filing
• Accounting

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VAT regulations for CSOs in Croatia OGI,
Osijek

• Mission
• To initiate and provide support to positive
  processes of social development in local
  communities through 3 programs human rights,
  community development and NGO support.
• Social enterprise
• To provide specialized accounting and financial
  management services to local small and medium
  size NGOs in the regions of Slavonija and
  Baranja.

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VAT regulations for CSOs in Croatia OGI, Osijek

• VAT exemption up to 85.000 kuna/year turnover
  (EUR 11.600) allowed to launch the social
  enterprise within association
• Competitive pricing while offering unique
  experties
• Once revenues exceed cap
• new legal entity (doo) owned by OGI
• price increase to reflect increased costs
• financial projections reflect changes as of year
  4 (1st year is VAT exempt for newly set-up for
  profits)

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Setting up a separate entity (ltd) in Hungary
Kava, Budapest

• Mission Experts in theater in education Kava
  provides workshops to disadvantaged children
  about serious social problems, such as
  discrimination, drug use, and crime.
• Social Enterprise selling drama-based trainings
  in conflict resolution and communications to a
  new sector private companies interested in
  worker satisfaction, retention, and performance.

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Setting up a separate entity (ltd) in Hungary
Kava, Budapest

• Sales volume increase exceeded capacity
• Separate entity improved transparency
• Ltd pays profit tax like any for-profit company
  (16)
• Ltd houses costs of social enterprise activity
• Ltd after tax profit turned back into Kava
  Associations nonprofit programs
• Possibility of transforming Ltd into nonprofit
  Ltd (new form)

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Using other forms of indirect support in Czech
RepublicDiakonie, Plzen
Mission Create conditions for securing social
services for mentally disabled people and people
in a difficult life situation, including day care
programs and housing.
Social enterprise Café and Tearoom Kacaba in
Plzen, which provides skill training to and
employs mentally disabled persons.
Providing catering services to companies for the
value of the fine those would pay for not
employing people with disability
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Romanian legal environment for CSOs and social
enterprises

• According to Romanian law there are
• 3 types of CSOs associations, foundations, and
  federations
• All commonly referred to as "non-profit
  organizations" in Romanian legislation
• CSOs in Romania are regulated by the
• Government Ordinance on Associations and
  Foundations, GO 26/2000, adopted in January 2000,
  further modified and put into law in 2005 by the
  Law on Associations and Foundations (No.
  246/2005).
• The Romanian legal framework explicitly permits
  CSO commercial activities as long as they are
  mission related.
• CSOs wishing to engage in non-mission related
  commercial activities have to set up a separate,
  for-profit entity.
• There is a limited profits tax benefit for CSOs
• CSOs are due for VAT, which is not reimbursable,
  and must pay customs duties
• CSOs must file financial reports (balance sheet,
  etc)

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Social Enterprise Archetypes

Embedded
Integrated
Complementary
SourceAlter, Kim, Social Enterprise Typography.
The Inter-American Development Bank, Washington,
DC, 2003.
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Summary of Romanian Tax Treatment of CSO
commercial activities
Company profits tax Depends on Structure of Economic Activity Depends on Structure of Economic Activity Depends on Structure of Economic Activity
Company profits tax Is activity Mission-related? Direct Economic Activity Separate Commercial Company
Company profits tax Yes Taxed on all profits, if revenue above EUR15.000 at 16 At 16 on all profits
Company profits tax No Separate for-profit company must be set up. At 16 on all profits
VAT On all purchases VAT to be paid at standard national rate 19, if turnover over EUR 35.000 limited exemptions VAT to be paid at standard national rate 19, if turnover over EUR 35.000 limited exemptions
Customs duties On all imports At standard customs tariff rates At standard customs tariff rates
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Setting up a separate entity (ltd, srl) in
Romania Bioterra

• Mission the Association of Organic Farmers of
  Romania, Bioterra, is a non profit organization,
  whose mission is to promote organic farming and
  food products in Romania and to provide training
  and support for small farmers who want to
  cultivate and produce organic agricultural
  products.
• Social enterprise fee based consulting services
  on organic farming, organization of demonstration
  plot visits, publishing books and pamphlets.
• Expansion of services (agro-tourism, e-commerce)
  and growth of sales volume (passing 15.000 EUR
  revenue threshold) necessitates setting up SRL
• Will pay 16 profit tax
• Will be able to hire more staff with business
  skills
• Will lessen burden of enterprise on program staff
  
• Will maintain strong links to organizations
  mission and programs

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Using legislation to aid SE, sheltered workshop
Motivation Foundation

• Mission to create sustainable programs to
  increase the quality of life of people with
  disabilities of all ages in Romania
• Social enterprise production and sales of
  wheelchairs and other mobility equipments grant
  funded program till 2003, is now expected to
  provide 20 of total revenues although Motivation
  SRL incorporated in 2001
• Model
• Separate economic entity - SC Motivation SRL
• Third party payment system - contracts with
  county offices of the National Health Insurance
  Company
• This allows MRF to fulfill its mission and to
  generate self financing income for the nonprofit
  organization.
• 2006 legal provision provides incentives to
  potential employers to purchase products from
  sheltered workshops as an alternative to hiring
  people with disabilities
• Mission impact in 2006 Motivation employed 45
  full-time paid staff (a 60 increase over 2004)
  and served 927 beneficiaries (a 112 increase
  over 2004). The organization currently employs 74
  full-time staff, of which 17 are wheelchair
  users.

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Legal framework for social enterprise in Romania
- limitations

• Fiscal advantages for CSO/non-profit/public
  benefit organizations are limited.
• In Romanian legislation the concepts of public
  benefit organization and mission-related
  activities are not well-defined and leaves room
  for interpretation.
• There is little involvement from CSOs in
  policy-making and legislative process.

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Other ways public funds can help CSO economic
activities

• Guarantee schemes
• Loan funds with soft conditions
• Venture capital
• Community Interest Tax Relief
• Mandatory reduction in local authority tax
  govt subsidizes local authorities
• Using publics funds to open up markets, equip
  CSOs to enter them (e.g. pass on assets, tax
  breaks on investments into CSO social
  enterprises)
• Do these schemes exist in CEE? Would they make
  sense?

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Improving the legal framework in Romania
Recommendations

• Allow CSOs to directly engage in non-mission
  related economic activities
• Reform tax regime eliminate (or lower) revenue
  threshold for profit tax for CSOs
• Expand VAT exemptions on CSOs comemrcial
  activities
• Introduce a uniform and clear concept of public
  benefit organization, specifying criteria, rights
  and obligations provide tax incentives
• Increase CSO involvement in the legal drafting
  process.

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• Thank you for your attention!
• Ana Negrila, Enterprise Development Manager for
  Romania
• anegrila_at_nesst.org
• Eva Varga, Enterprise Development Director,
  Europe
• evarga_at_nesst.org
• www.nesst.org