The purpose of a charity, or non-governmental organisation (NGO) or not-for-profit organisation (NFP) is to perform some useful social role, and not to make profits, so you might think that they do not have to worry about tax issues.
But in most cases, you would be wrong, and as always Africa can be a scary place to be caught with your pants down on the tax side. Potential problems abound for this sector and can become very serious if ignored.
Seven serious slips to steer clear of.
Today we discuss seven pointers NFPs should be aware of to keep out of trouble with the taxman:
1 – PAYE
If the organisation employs people, it will almost always have to deduct employees tax or pay as you earn / PAYE, and the myriad other obligations that come with being an employer – pension contributions, social security contributions etc. This does not go away just because you are a charity of some kind – but if the salaries are funded by USAID or another donor with a similar arrangement with the country of operations, then there may be an exemption for the foreign staff.
2 – Fringe Benefits or Benefits-in-Kind
PAYE is not just levied on monthly salary paid in cash, but also on benefits, such as use of a car, or free housing, bonus or 13th cheque, cheap loans, subsidised transport. Trips to the employee’s home country are normally taxable – but maybe not at the end of contract, and not if they are for the charity’s business.
3 – Income Tax
Often, charities are exempt from corporate income tax. But not always – different countries have different boundaries on what is exempt. And you may need to formally apply to the tax authority for an exemption, rather than it being given automatically. In many countries, you will need to register for tax and file an annual tax return, with accounts – even if there is no tax to pay. This is so that the taxman can check what you are doing, so he doesn’t miss out.
You may also have some income that does not directly arise from the charitable activity – such as bank interest, or perhaps a profit from a bookshop ancillary to the charity. This is likely to be taxable.
4 – Your Donors
You may be able to help your donors get a tax deduction for their donations. Which might make them more willing to give, so it’s careful to check this for the relevant countries.
5 – VAT
This should be quite easy, if what you provide is exempt from VAT. But working out what is exempt can be a bit of a task in some countries. If you give something away free, you would expect that to mean that there is no VAT anyway – but that may depend on how this is financed. So, if you receive a grant to enable you to give something to recipients, that could mean that you have to pay VAT on the grant. No problem if the thing you give to recipients is exempt from VAT, and if it is “zero rated,” then you should be able to claim back VAT on purchases in most countries.
6 – VAT reclaims
When you spend money to buy goods or services, you probably pay VAT as part of the price. You can claim this back if you are required to charge VAT on what you sell or provide. This means understanding the rules, registering for VAT, and filing VAT returns periodically.
7 – Other taxes
You may find that you have to pay taxes for occupying property (e.g. rates), or for buying or leasing property. Again some countries have exemptions for certain charitable activities.
Overall, even a charity or NGO has tax obligations, which are best handled by knowing about them as early as possible. Rules vary from country to country, but assuming that there are no taxes to pay is definitely dangerous. And you can be sure that there will be forms to be filled and filed. Many countries have increased their scrutiny of the voluntary sector of the economy, so you may find that there are other, non-tax related, registrations required with government agencies.
Hopefully, knowing what has to be done, and then doing it, will keep you out of trouble, and let you keep more of your money to fulfil your purpose. Tax laws are complex, but please let us know if you would like to understand better how they can apply to you.
Meet the Author
This article was written by our man in Africa, Russell Eastaugh. Russel has extensive African experience, in particular in Nigeria and Uganda, and extensive experience of the betting industry. Contact Russell at reastaugh@reganvanrooy.com
