Tax teeth bared to bite into donations

Photo: Arvo Meeks / Lõuna-Eesti Postimees

Fuel excise rise isn’t the only source the government is eyeing to fund election promises. Civil societies have arisen to battle a bill prepared by finance ministry with potential to substantially suppress desire in Estonians to do good.

We are talking about an income tax act amendment which, if enforced, would from 2016 cut deep into the foundations of tax refunds by state to citizens at end of year.

As things stand, private persons get income tax back from up to €1,920 spent, including stuff like home loan interests, training costs and – as last in line – donations. The reason the state is handing back 20 percent of said costs is simple: to enhance acquiring a home, educating oneself and charitable acts.

In dire need for means, the finance ministry is fixing to tighten the taps by more than a third. Pursuant to the bill, the sum total of allowed reductions would drop from €1,920 to €1,200. Also, a string of trainings would no longer be tax-refunds-eligible.

Should this materialise, income tax refunds would shrink for 12 percent of those declaring alone and eight that declare jointly. The state, in turn, would over the four years gain €2.7m to be channelled towards fulfilment of election promises.

Donations the prime target

The thing is, donations will suffer bulk of the blow. Namely, Tax Board will regard home loan interests and training costs as priority. If a person has also donated, but the return limit is reached, the income tax on donations will stay in state coffers.

«Naturally, people will use up the other costs first – the kids’ training costs, home loan. And then the very people who might be able to donate may have crossed the €1,200 limit. One they know the limit is up, they will not make the donations,» predicted Agu Laius, chairman of National Foundation of Civil Society (KÜSK).

There’s the rub: the very income tax return has been the argument that civil societies have been underlining as a bonus when asking for donations.

Mr Laius admits that an average donator will probably not think about the income tax returned at the end of year. Even so, this may be reckoned by philanthropists and major donors whose yearly input amounts to thousands of euros.

In 2013, for instance, the largest private donations came close to €80,000. 857 i.e. 2.3 percent of all involved in charity donated beyond €1,200 during the year.

«World experience says the larger the sums donated, the more the tax incentive matters,» said Network of Estonian Nonprofit Organisations (EMSL) policy chief Alari Rammo.

In other words, should the law enter into force, there’d be a real danger for big donations to dry up.

The more strange, therefore, that finance ministry never included civil societies in the legislative process and limits itself to one sentence regarding donations in its letter of explanation. A lone warning regarding donations was uttered culture minister Indrek Saar (SDE). That, however, hindered him not from approving the bill.

«They dare not to cut home loans interests return separately, and then the pull the whole ceiling down. Here, civil societies are simply civil casualties,» observed Mr Rammo who, having heard of the governmental plans, sent finance ministry his own proposals.

The first of these was not to include donations in the €1,200 limit. Secondly: Mr Rammo thinks the state could alleviate the existing limit pursuant to which a physical person may only count gifts and donations under tax return up to five percent of his yearly income. These ideas are nothing revolutionary – as early as in 2011, this is what think-tank Praxis advised that Estonia should do.

The Praxis report is citing a scientific research which proved a cause-effect link between donations and income tax refund. «The option to get tax refund plays a vital role at every level of income and especially when it comes to size of donations,» says the report.

Just as now Mr Rammo, back then Praxis suggested that the state untie donations from the income tax ceiling, as these have not been made for the person’s own benefit but for that of someone else.

Thus far, the state has remained deaf to the advice. In fact, the opposite is true: donations continue under tax refund ceiling, and the latter has continually been lowered. The last time it dropped – to €1,920 – was in 2012.

Praxis admits that keeping donations under the ceiling makes some sense – to prevent possible tax fraud with donations and to reduce Tax Board work load. It’s another issue if the fraud fear is always justified.

Anyway, in a way most ironic the government uses the bill to eat away at its own promises. This year, they approved a civil society development plan which prescribes that by 2020 the government enhances donations by about three million euros to €21m. Whence now the enhancement? Even in 2014, the declared amount of donations dropped by a million euros, year-on-year, to €16.6m. As for donations by private persons, these are way below the record set in 2007.  

Govt intends to think

According to Anti-Bullying Foundation (SA Kiusamise Vastu) founder Rasmus Rask, there is a threat for Estonian mentality to become «Swedish-like». In other words, instead of doing something, they will hope for the state to help.

«People will be thinking that it is up to the state to solve all problems. If in Estonia also signals are increasingly sent that donating is not what the state supports, citizen activism will surely be affected,» said Mr Rask.

Finance minister Sven Sester (IRL) said he has ordered his staff to analyse proposals by civil societies. This would not be easy as there is no data on how application of various limits would affect deduction of donations.

«I am of the opinion that donations culture is worthy of state support. Even so, we should not hasten to adopt the US model (donations are tax free – O. K.), as that raises tax-related questions. If a person can donate all or most of his fortune into some charitable fund, tax free, control must also be ensured regarding the use of that money for the specific purposes,» said the minister.