International Practices for Regulating Charity and Giving
Presented at the conference "Philanthropy-From Exception to Tradition"
Vilnius, Lithuania, November 19, 1999
by Stephan E. Klingerhofer
Philanthropy, in its simplest sense, is an attitude of generosity that is made real in an action of giving. In terms of development of civil society in many emerging democracies, personal philanthropy is relatively undeveloped because of the absence of accumulated capital in individual hands. However, opportunities for corporate or business philanthropy are great. The fact is, nevertheless, that business leaders often do not understand the role of civil society in their communities, nor do they appreciate the impact business giving can have to improve the lives of people in their communities who are employees, customers, or simply fellow citizens.
The key to the growth of corporate philanthropy is that understanding, that sense of "corporate citizenship" - that companies are part of the society in which they operate, and the well being and health of their communities affects their own health and well-being. Therefore, in addition to the ordinary investments companies make in labor and technology, they also need to consider their "community investments."
This perspective is particularly important in Central and Eastern Europe, where the state is faced with demands for public goods and services and simply cannot meet them. Even in the more affluent countries, the state is cutting back on provision of direct services, and looking for ways to replace its own activity with other service-providers that can respond more efficiently and less expensively.
Philanthropy pays off for companies as well. Corporate citizenship improves the community and the company. There are macro-economic benefits: most important, political and social stability and the rule of law are enhanced through company support of organizations that provide cultural and social services. And there are micro-economic benefits:
· Improvements in employee loyalty, productivity, profits [as in the experience in Japan of Fuji Xerox and Cannon, whose community investments were found to result in measurably higher domestic profits and productivity, because employees saw their company as concerned about their family and community lives];
· Name recognition and improved company image [market shares improve in part because of "free" publicity and association of the company with a popular cause];
· Company good will with major players in community - useful for opening markets [such as American Express promotion of tourism in Hungary and Motorola providing high-tech equipment for Vietnamese hospitals].
The idea of "community investment" as a perspective on company philanthropy represents value and benefit to the community and the company alike. Of course, companies can make many kinds of investments:
· Direct contributions to civil society organizations (NGOs) that provide services the company perceives as desirable, either from the company itself, or through a foundation it establishes for the purpose. These contributions can take a variety of forms: financial, equipment and technology, volunteers from the company's employees (teaching computer skills, for example), use of company space (for a day care center or clinic, for example).
· Providing public services directly, also sometimes through the company foundation: education programs, centers for elderly or clinics or day care for children -- all benefiting employees and the general public alike.
· Sponsorship -- uniforms and supplies for sports teams, or cultural events (concerts, art shows, etc.)
Companies can carry out all of these examples individually, or in partnership with other companies, with NGOs, or even with organs of the state (national, regional, or municipal).
International Practices
In general, countries around the world are supporting corporate philanthropy, because governments see that when business assists in providing social services, the costs to the state are reduced. This general point is true even where the state encourages philanthropy through tax incentives. Cost savings in the provision of the services offset the loss in direct revenues. In addition, the state benefits by the general increase in well being, community strengthening, and social stability that results from effective corporate citizenship.
Some countries include regulation of corporate and personal philanthropy in their general laws governing NGOs and taxation. This approach is the simplest to administer and for citizens' compliance.
Some countries enact a law specifically governing charities and charitable giving. This approach is satisfactory, so long as it is clearly correlated with the general tax and status laws affecting the not-for-profit NGO sector. Such correlation includes same terminology and explicit cross-referencing. What is not encouraged is the enactment of a variety of different laws that introduce different regimes and terminology, but governing essentially the same organizations and transactions. (Ukraine)
In regulating philanthropic giving, as in all regulation especially with respect to civil society, simplicity, consistency, and limited official discretion are criteria for best practices in the emerging international principles.
As noted above, the three ways in which companies undertake philanthropic activities are through direct giving and through company foundations, through in-kind giving of goods or services, or through sponsorship. Sponsorship is usually treated by tax authorities as a form of advertising, and is therefore frequently deductible for tax purposes as a business expense. To encourage other forms of philanthropy, most countries permit companies to deduct gifts of money, and the value of in-kind goods and services, from their profits for the purpose of profits or income tax. Usually a limit is applied (5-10%). Such deductions are usually provided in the tax code, with reference to certain kinds of activities or organizations that can receive such tax-deductible gifts.
These activities or organizations usually are termed "public benefit", defined as educational, ecological, human rights, social service for children or elderly, or poor, cultural, sport, health, and other similar purposes. Such purposes must be explicitly included in the statutes and registration documents of the organizations. The status or charity laws may expressly provide for these kinds of organizations, even by title "public benefit" (as proposed in Bulgaria), or as "charitable," but with similar definitions.
The theory behind these tax benefits is that the state recognizes the funded activities and organizations as beneficial to the public and the state. Such indirect state-provided benefits are more flexible than direct state funding, require less state administration and supervision, and encourage business citizenship as a creative, entrepreneurial activity.
Through laws regulating contracting and procurement, state-business-NGO partnerships can be formed as well. These laws must be developed carefully, encouraging flexibility in procurement procedures.
Status laws often permit companies to establish foundations, with tax benefits to companies that fund them, to facilitate giving for public benefit activities and organizations.
State supervision, under these practices, is accomplished largely through tax regulations, requiring normal records of donations, by donors and recipients, as well as published financial reports by the recipients of company donations. It should be noted that the public nature of these reports benefits the donors by publicizing their good works, and the recipient organizations by showing their honest and their attractiveness to established businesses as appropriate beneficiaries of their generosity. Such publicity also enables the public at large, as well as the government, the company shareholders, and the media to monitor such giving.
It has been demonstrated in many parts of the world that the phenomenon of corporate philanthropy benefits all parties - the state, the businesses themselves, the organizations and activities performing public services that receive donations, and the public as a whole. This lesson must, however, be learned by all these parties. The natural distrust at the outset can be overcome by seeing how corporate philanthropy has succeeded elsewhere, and a breakthrough can happen when the first few gifts are made that enable real public benefits to result. It will be the job of enlightened leaders from all sectors to take the message to the public and to implement the legal vehicles to make corporate philanthropy a reality.
