Editor’s Note: This is an adapted translation of an article originally published by the China Philanthropy Times.
In January 2021, the Ministry of Finance, the State Taxation Administration Bureau and the Ministry of Civil Affairs (hereinafter abbreviated to the Three Departments) and the relevant departments of each province, successively released the 2020 – 2022 list of charitable social organisations eligible for pre-tax deduction of charitable donations.
In a shock to the non-profit sector, in comparison with the previous list, the number of charitable social organisations eligible for pre-tax deduction of charitable donations decreased.
On February 7th, the Three Departments released the Announcement on Transitional Issues Concerning the Confirmation of Qualifications for Pre-tax Deduction of Charitable Donations, amending the regulations related to the proportion of expenditure on charitable and philanthropic undertakings and management costs, evaluation levels, tax exemption eligibility for non-profit organisations and other aspects.
As a result of these amendments, more social organisations will be eligible for pre-tax deduction of charitable donations. Thus, donors and companies who donate to these social organisations can enjoy tax deductions.
This will undoubtedly have significant benefits to the development of charitable undertakings.
I．Amendments to the requirements for the proportion of expenditure on philanthropic and charitable undertakings and management expenses are in line with the 2016 regulations.
In 2020, the Three Departments released the Announcement on Matters Concerning the Pre-tax Deduction of Charitable Donations which stipulates that in order to qualify for pre-tax deduction of charitable donations, the following requirements must be met in relation to the proportion of expenditure on charitable and philanthropic undertakings and management expenses:
“3. For social organisations with public fundraising qualifications, the proportion of annual expenditure on charitable and philanthropic undertakings in the past two years must not be less than 70% of the total income of the previous year. In calculating this proportion, the average income of the previous three years may be used instead of the total income of the previous year.
For social organisations without public fundraising qualifications, the proportion of annual expenditure on charitable and philanthropic undertakings in the past two years must not be less than 8% of the previous year’s end of year net assets.
In calculating this proportion, the average end of year net assets of the previous three years may be used instead of the previous year’s end of year net assets.
4. For social organisations with public fundraising qualifications, the annual management costs of the previous two years must not exceed 10% of the total expenditure of the current year.
For social organisations without public fundraising qualifications, the annual management costs of the previous two years must not exceed 12% of the total expenditure of the current year.”
This requirement is not entirely consistent with the Regulations on Annual Expenditures and Management Costs for the Charitable Activities of Charitable Organisations which was jointly published by the Three Departments in 2016.
The Regulations on Annual Expenditures and Management Costs for the Charitable Activities of Charitable Organisations adopts management regulations in stages. Taking the differences in organisational nature, activity characteristics, asset scale, composition and other aspects of foundations, social groups and social service organisations into full consideration, the regulations are divided into four levels.
The inconsistencies between the aforementioned 2020 announcement and the regulations of 2016, mean some social organisations that qualified according to the 2016 regulations were unable to gain eligibility for pre-tax deduction of charitable donations for 2020 – 2022.
The Announcement on Transitional Issues Concerning the Confirmation of Qualifications for Pre-tax Deduction of Charitable Donations implements a supplementary regulation on this issue:
“For charitable organisations and other social organisations which have been legally registered with the Ministry of Civil Affairs, the proportion of expenditure on charitable and philanthropic undertakings and management expenses in 2018 and 2019 can be implemented according to the regulations related to the announcement by the Ministry of Civil Affairs, Ministry of Finance and the State Taxation Administration Bureau on the Regulations on Annual Expenditures and Management Costs for the Charitable Activities of Charitable Organisations.”
This resolves issues caused by the inconsistencies, giving more lawful social organisations the opportunity to become eligible for pre-tax deduction of charitable donations.
This amendment has been extended to the next eligibility confirmation:
“When confirming the 2021 – 2023 eligibility for pre-tax deduction of charitable donations, the proportion of expenditure on charitable and philanthropic undertakings and management costs for charitable organisations in 2019 and 2020 can be implemented in accordance with the regulations related to the announcement by the Ministry of Civil Affairs, Ministry of Finance and the State Taxation Administration Bureau on the Regulations on Annual Expenditures and Management Costs for the Charitable Activities of Charitable Organisations.”
Will this amendment be extended to 2022 – 2024? Or is it possible to completely resolve this issue?
II．Considering the actual situation and adjust requirements for the evaluation system
In 2020, the Three Departments issued the Announcement on Matters concerning the Pre-tax Deduction of Public Welfare Donations, stipulating that organisations with valid 3A or higher (including 3A) professional standard can obtain pre-tax deduction qualifications for public welfare donations.
According to the Measures for the Management of Social Organisation Evaluation System, issued by the Ministry of Civil Affairs in 2010, social organisations that want to apply to participate in the evaluation have to confirm that they have already obtained registration certificates of social organisations, foundations and private non-enterprise units for at least two years.
In other words, if social organisations established in 2018 and 2019 attempt to verify their eligibility for the pre-tax deduction of public welfare donations for 2020-2022, they are in fact not able to do it because they cannot participate in the social organisation evaluation even if their actual level of standard might have already reached 3A or above.
In the meanwhile, due to the COVID-19 pandemic, the assessment of social organisations in 2019 was postponed until a much later date.
Take social organisations operating nation-wide as an example, until July 2020, the Social Organisation Service Centre of the Ministry of Civil Affairs just announced the list of 96 social organisations eligible to participate in the 2019 national social organisation evaluation. On October 19h, another batch of 14 eligible organisations was announced.
On February 3rd 2021, the results of the 2019 national social organisation evaluation was released. The publicity of the results lasted until February 8th so even if organisations participated in the 2019 national social organisation evaluation according to the requirements in the Announcement on Matters Concerning the Pre-tax Deduction of Public Welfare Donations, they will not be eligible for pre-tax deduction due to delayed evaluation results.
In the aim of encouraging public welfare donations considering the impact brought by the pandemic, the newly published Announcement provides exemptions of:
“From 2018 to the date of the release of this announcement, social organisations that has gained the level of 3A or above in the most recent evaluation; for social organisations established in 2019 as well as social organisations that have been evaluated but have not yet issued a conclusion from 2019 to the date of this announcement, their evaluation results may not be considered for the time being when confirming their qualifications for the pre-tax deduction.”
With this provision, more social organisations that are unable to participate the evaluation or have not yet obtained their level of professional standard will have the opportunity to qualify for pre-tax deduction of public welfare donations.
However, this does not mean that these social organisations do not need to take the evaluation. The Announcement also stipulates that those who have obtained pre-tax deduction for public welfare donations in accordance with the Article mentioned above have to obtain the level of 3A or above in the social organisation evaluation.
III．The nonprofit organisations’ tax exemption status of social organisations may temporarily not be taken into consideration.
In 2020, the three departments issued the Announcement on Matters Concerning Pre-tax Deduction of Public Welfare Donations, stipulating that, to obtain the qualification for the pre-tax deduction for public welfare donations, a social organisation must have the valid nonprofit organisation tax-exemption status.
According to the Notice on Matters Related to Administration of Approvals of Nonprofit Organisations’ Tax-Exemption Status, the nonprofit organisations that meet the requirements must apply for tax-exemption status at their local tax authority, and provide all required documents. The Finance and Tax Departments shall, in accordance with the above-mentioned regulations, jointly review and approve the eligibility for the tax-exemption status, and regularly publicly announce approvals.
Due to the time needed for the review and approval process, at the time of issuing qualifications for pre-tax deduction for public welfare donations for the period 2020–2022, some social organisations, after submitting their qualification’s application, have not yet had their nonprofit organisations’ tax-exemption status approved.
For instance, on May 26th 2020, the Announcement on the List of Nonprofit Organisations in Beijing that have been Approved the Tax-exemption Status for the batch 19/2015, 12/2017, 10/2018 and 5/2019 was published. On this list, there were not only applicants from 2019, but also even those from 2015.
The processing time factor has led to many organisations that had actually met the requirements to become ineligible to apply for the qualification for public welfare donation pre-tax deductions.
With the intent of solving this problem, Announcement on Cohesion of Matters Related to Approval of Qualification for Pre-tax Deduction for Public Welfare Donations was published. It confirmed that for issuing the qualifications for the period 2020–2022, the nonprofit organisations’ tax-exemption status might temporarily not be taken into consideration; however, the tax-exemption status will have to be obtained within the period of the validity of the qualification.
IV．Are further amendments possible?
The release of the Announcement on Cohesion of Matters Related to Approval of Qualification for Pre-tax Deduction for Public Welfare Donations will greatly help the process of approvals of the qualifications for the 2020–2022 pre-tax deduction for public welfare donations. According to this new regulation, there will be a new batch of social organisations that will granted qualification for the 2020–2022 pre-tax deduction for public welfare donations. As for who they are, we will have to wait and see.
But one questions remains: is the Announcement on Cohesion of Matters Related to Approval of Qualification for Pre-tax Deduction for Public Welfare Donations only targeted at the 2020–2022 period, or is there a possibility of making this policy a more long-term adjustment? Is there a chance to see the Announcement on Matters Concerning Pre-tax Deduction of Public Welfare Donations itself directly amended?
More efforts from the public welfare sector will be required for this to become a reality!
