By MAGGIE JARUZEL POTTER
In Russia, when a charity paid for specialized care for children battling ongoing health issues, such as cancer, their families owed taxes on all services following the first treatment because the contribution was treated as personal income. Volunteers who donated time to non-governmental organizations (NGOs) had their reimbursed expenses taxed as income, and NGOs accepting free advertising were required to pay taxes on the fair-market value of the donated services.
International Center for Not-for-Profit Law (ICNL)
“The taxes for donated services were huge — sometimes bigger than an organization’s annual budget,” said Maria Chertok, director of Charities Aid Foundation Russia
That all changed in July 2011 when the Russian Parliament adopted amendments to the tax code that resulted in wide-sweeping improvements for NGOs, including eliminating taxes in the situations mentioned above. The changes were the culmination of a decade-long educational and advocacy campaign by Russian NGOs, which provided input so the laws were crafted to help not-for-profit organizations, their beneficiaries, volunteers and supporters, Chertok said.
In late September 2011, CAF Russia — along with several other organizations, including Russia Donors Forum
(RDF) — hosted “Legislation on Philanthropy in Russia and the European Experience.” The Moscow conference was designed to educate those in the philanthropic field about the practical implications of the recently passed legislation and to bring to the attention of experts and government officials the tax issues not yet addressed. It drew about 200 NGO leaders, attorneys, public officials, tax specialists and others interested in the reforms, she said.
CAF Russia and RDF both have received support in philanthropy development through the Charles Stewart Mott Foundation’s Civil Society program
. Since 2002, RDF has received five grants totaling $392,000. CAF has received 40 grants totaling $6.8 million since 1988. Of the total, $3.5 million has been earmarked for work in Russia since 1994, including a $1-million grant to build an endowment. (Endowments are long-term investment funds that allow the interest earned to be spent while the principal amount is not touched).
By changing several tax laws, some of which already are in effect, Chertok says, the government has formally recognized the important role NGOs play in Russian society.
“For many years, nothing changed in the legislation and it seemed so hopeless. But here we are now seeing results, so there is progress,” she said.
The changes were partly aimed at reducing the tax burden on NGOs so they could become more self-sustaining, said Natalia Bourjaily, vice president at the Washington, D.C.-based International Center for Not-for-Profit Law (ICNL). A native of Belarus, she is responsible for overseeing programs for the Newly Independent States (former Soviet Union countries).
A Mott grantee since 1993, ICNL has received 21 grants, totaling $1.5 million.
On behalf of ICNL, Bourjaily and her colleagues provided informational and analytical assistance to Russian NGOs that helped open the door to this year’s changes, including extending to NGOs the tax exemptions previously available only to public institutions, she said.
For example, before the changes, NGOs that delivered social services — such as care for the elderly or mentally ill — were at a disadvantage when competing with public institutions for government contracts because they were required to pay Value Added Tax (VAT), bumping up the cost of their services. But Bourjaily hopes the legislative reforms will make services provided by NGOs more competitive cost-wise and also encourage more not-for-profit service providers to compete for government contracts.
Another newly approved legal change offers tax deductions to individuals who donate to registered charities, religious organizations and other public-benefit NGOs. Russians can now deduct donations that do not exceed 25 percent of their total taxable annual income — even when the money is earmarked for building endowments. Allowing such deductions, Bourjaily says, could help strengthen NGOs’ sustainability in fields such as health care, education, the arts and culture.
“What I’ve learned is that deductions really do matter, although they influence more big donors to give than the average person,” she said.
But the tax deductions do not apply to all Russians with high incomes because those who generate money from interest and dividends instead of a regular wage are ineligible, Bourjaily says. That exclusion will be targeted in the next round of reforms, she says.
Most of the July 2011 tax law changes do not apply to businesses either, Bourjaily says, so they also will be highlighted in future tax law campaigns. In the meantime, she and her ICNL colleagues plan to stay busy hosting informational meetings and trainings about these recent legislative changes.
“We focus on legal issues for civil society organizations,” she said. “We believe in building local capacity so whenever new legislation is adopted we inform lawyers, government officials and NGOs about what it is and how they can comply with it.”