THERE has been a lot of debate of late in the papers and online about taxing churches, but churches are not the only tax-exempt organisations in the country. There is a whole sector of not-for-profit or non-profit (for short) entities that operate in Zimbabwe (and some operate in Zim but are based elsewhere). This article examines how these nonprofit entities can be taxed.
Let’s first give some examples of non-profit organisations; they range from religious organisations – this will be your typical church like Methodist, Catholic, Apostolic Sect, etc. Next there are public charities (organisations catering to people with disabilities, schools, colleges and universities, etc), Private Foundations (these are mainly for wealthy individuals who set up a charitable organisation), Social welfare and service organisations, Non Governmental Organisations (NGOs) these perform a type of public or community benefit, and their principal feature is the absence of direct private benefit.
We also have labour organisations (e.g. trade unions, teacher organisations, etc), trade associations (e.g., Chamber of Commerce, Chartered Accountants, Engineers,) and Political organisations (e.g. regular political parties), Social and recreational clubs (e.g., Burial societies, Country clubs, Amateur sports clubs), veterans organisations, Co-operatives, pensions trusts, Childcare organisations, Homeowners associations and Shelter organisations like SPCA.
These organisations are normally exempt from income and other taxes because their principal purpose or goal is not profit seeking. They provide assistance for the poor, the distressed, or the underprivileged, they seek the advancement of religion, politics, education, science, they assist and lessen the burdens of government, and they assist in building neighborhoods and uplifting society as a whole. Compare this to a tax-paying commercial organisation whose sole goal is to earn a profit and reward its investors.
There are several objectives in a tax system, the main one is raising revenues, other equally important objectives include, economic; for example to control certain business activities, and social considerations; for example allowing deductions for contributions to qualified charitable organisations, political and special interest considerations like imposing taxes and tariffs on certain imported goods to protect certain industries.Advertisement
What sort of taxes can Zimbabwe Revenue Authority (ZIMRA) impose on nonprofit organisations? With its sweeping powers the agency can impose a wide variety of taxes at its disposal ranging from income tax, excise tax, sales tax, VAT, gift tax, presumptive tax, property tax, flat tax, and the list is endless. The question is, is it equitable and what is the actual goal of ZIMRA. If the goal is to raise revenue, perhaps this sector may not be the best area to target as the goal of most non-profits is not profit maximization.
If the goal is of a social consideration such as bringing order to an almost unregulated nonprofit sector, perhaps the Revenue Authority should look at the tax system in a holistic approach. Perhaps one way to start is by proposing that all sectors be subject to taxation, and all income from whatever source is subject to taxation and this includes illicit income too (from bribes, corruption, racketeering, fraud, embezzlement including all vices); unless the income is specifically listed and excluded from taxation then all and sundry is deemed taxable.
An example would be to say religious and charitable contributions, donations; pledges are listed as exempt from tax. Going back to the goals of ZIMRA, one of the goals might be to bring equity between taxpaying entities and nonprofit entities that operate commercial enterprises so that there is fairness in the marketplace; we are yet to learn about ZIMRA’s goals.
Either way a bona fide non-profit organization, after its formation and registration with the relevant statutory body or Ministry, will then apply for a tax exemption status from ZIMRA by filing the required application paperwork and paying a reasonable fee, stating clearly the purpose for which it is seeking tax exemption; such purposes could be furthering the interests of; Religion, Charity, Educational, Scientific, Arts & Culture, Politics, Amateur Sports, Environment, Prevention of cruelty to children and animals.
If granted tax exempt status, the nonprofit organisation should file on a yearly basis a Compliance and Informational Tax Return showing financial statements including their program of activities and also showing how they are supporting their mission and accomplishing mission goals. The compliance return should indicate, the board members and names of major donors. Being granted tax exempt status means the nonprofit organisation may be utilizing services (like infrastructure) paid for by other taxpayers so the financials of the nonprofits should be a public document and be available on demand to any taxpayer or donor either by being posted on the website of the nonprofit organisation or by mail when requested.
Being tax exempt does not mean a blank cheque; many nonprofit organisations operate business type enterprises such as, shops, bookstores, leasing real estate, pharmacies, security investments, farms, etc. There is need for a separation in accounting between the core mission activities and business type activities. It’s unconscionable to tax the core mission activities of a bonafide non-profit organisation but it can be fair game to tax unrelated business type activities which differ from the exempt purpose of the organisation of the same nonprofit as these are characterized as exchange transactions and the tax rate can be a graduated tax rate or a flat tax rate, with the goal here being to even the playing field with taxpaying profit seeking firms.
Defining unrelated business to the organisation’s exempt purpose requires clarity; for example if a church operates a supermarket and the income funds the operations of the church, remember the church was given tax exempt status for the purposes of furthering religion and not operating a supermarket, so income from the supermarket will be taxable. How about if the store is selling religious material like bibles, hymn books, etc, – this income will not be taxable because it is related to the exempt purpose of furthering religion. How about if the church operates a store at a mission school which the church owns, will the income be taxable, the answer will lie in satisfying three conditions;(i) is it unrelated to its exempt purpose?, (ii) does it operate the store regularly and (iii) is the income substantial, if any one of the above conditions is not met then its incidental and the income is not taxable.
However if all the three conditions above are met then the income is taxable. The third condition of being substantial requires a threshold level. For example it can be say shop income above 10% of total core mission receipts (that is receipts from donations, contributions, grants, dues, etc). The reason for this is you do not want to tax income from tuck shops, cafeterias and small kiosks or gift shops in museums which are there for the convenience of the users but you want to discourage nonprofits from entering into commercial activities under cover of being tax exempt.
Picture this; you can have a supermarket owning a church to get the benefits of tax exemption or a church owning a supermarket, so you want to discourage abuse of tax exempt status. The revenues of core mission activities mainly come from public support in the form of donations, tithes, fundraising, grants, pledges, program fees, membership dues, etc and expenses are mainly administration and general expenses. Special Purpose Accounting framework has to be applied to this sector due to the nature of its operations. To fully appreciate the complexity of this sector, one has to understand the need for dual accounting in this area as the core mission has to be accounted separately from the business type services and then consolidated after taxation of the business type services.
So the core activities can use the simple Cash accounting called Fund Accounting which many nonprofits already use and the business type activities can use Accrual Accounting which comes with benefits such as depreciation and interest deduction (mainly used in the private sector). Many Nonprofits are familiar with a budget which is an example of Fund Accounting; a budget is a result of a political process in an organisation, resulting in resource allocation, the budget is an internal document. The taxing authorities are interested in the results of operation (The Financial Statements, fodder for the Accountant).
Nonprofit organisations that fail to submit Compliance Tax and Informational Returns to the taxing authority will then face penalties including losing tax exempt status. Again non-profits that operate outside their mandates, engaging in excessive benefits to founders, directors and management above prescribed ratios of program versus admin expense to total receipts will then be subject to further scrutiny from the Authority.
Likewise, expenses which do not further the purposes for which the nonprofit was granted tax exemption status can be disallowed and be subjected to taxation. For example, if a church has excessive entertainment expenses or sponsors events which do not further its main tax exempt purpose which is religion.
With the mushrooming of so many nonprofit organisations in the country now, if each nonprofit is required to file annual compliance reports, for sure you will certainly create upwards of a thousand perhaps five or even tens of thousands of new accounting jobs for the young people of Zim.
Norman Nyamandi (MBA) is an Authorized IRS Tax Consultant based in Dallas Texas. He can be contacted at: firstname.lastname@example.org or by visiting the website www.promarketfinancial.com