PART TWO OF A TWO PART SERIES
Imagine that yesterday, there was horrifying news of a natural catastrophe in a remote part of (say) Indonesia, with great loss of life and fearsome numbers of the population evacuated from their homes, and appalling weather exposing those suffering privation from further risk of disease, and worse. Unsurprisingly, you (and many others) are desperate to help and you look to see how you can make a difference, and you find a well-respected charity operating in the region which is familiar with the country and the language, has a track record of being efficient in their dealings with Government organs, and is far enough away from the disaster area to have its staff largely intact and able to spring into action.
So out comes the cheque book and you are ready to make an immediate impact. So you look up the details on the website and find the address and, suddenly, you realise that the charity is based in Indonesia and despite the fact that you have every confidence in its integrity and organisation, and are convinced that it is the best charity to be able to make a real difference, you are not going to be entitled to make your donation that much larger and helpful by being able to give the benefit of tax relief that you would claim. You are therefore trapped into reviewing the options of giving to a charity where you will get that relief, in the hope that it will act as an intermediary to transfer the funds on – with loss of time, focus, and at a cost, however noble the local charity may be.
How did we get to this place? Let us remind ourselves of the basic rule that is in force in the UK when it comes to tax relief on charitable giving. In essence, a taxpayer can claim tax relief against income tax at his or her personal top rate of tax on the amount which he or she donates to charity, so that a person who has an income of £1million and who gives £1million to charity theoretically pays no tax! I have never done that, so cannot confirm it! The suggestion in the Budget of 2012 that the relief should be limited to a maximum of charitable giving of £50,000 per annum was greeted with such powerful cries of horror that the Government backed down. Maybe they realised that the number of taxpayers giving more than £50,000 per annum meant that the saving of tax relief was tiny, for they certainly did not back down on the imposition of a restriction of reliefs in other areas of claim, such as business losses!
Other generous charitable tax reliefs apply for Capital Gains Tax and Inheritance Tax where assets, or part or all of a person’s estate pass to charity and it must be agreed that the picture is a good one in sending a message that gifts to charity are to be supported. Particularly with this readership, a contrary view would be unpalatable! We expect it in a civilised society.
So far, so very good, but we have made an assumption here by talking about gifts to “charity” and we must define what we mean by this term. I am not talking here about the definition for UK purposes which was widened in the Charities Act 2006, but about territorial issues and inconsistencies.
The UK rule for the availability of tax relief was set out in the Dreyfus case (Dreyfus (Camille and Henry) Foundation v IRC  A.C.39), in that relief was only given for a gift to a UK charity, even though the purposes of the foreign charity were charitable under the law of the UK. But it is clearly acceptable that a gift to a UK charity will be allowed even though the gift will be applied completely outside the UK. The charitable test, as the Court held in the Dreyfus case, depended on where the charity was established. So it is perfectly acceptable to give for relief of distress in Indonesia, provided we give through a UK charity.
Over the years, this has led to the artificiality of overseas charities setting up UK organisations as separately registered feeders to their own purposes. And the same solution applies in the US where there is an equivalent rule that you only get a deduction for US tax if you give to a body registered under the US Code section 501 (c) (3).
Now, you may say that it is quite understandable that each nation should want to ensure that charities are properly registered and supervised and that it is right that it should be considered to be a matter of domestic law. But the dam is breaking on that issue, and it is now recognised that registration and supervision in one country is a separate issue from whether charitable payments should be tax relievable. The undermining factor was the 2009 Persche case in the European Court of Justice (C318.07) where the Court held that the restriction of a deduction in one Member State, in that case Germany, to purely domestic charities was in breach of European principles. The result was the enactment of section 30 (and Schedule 6) Finance Act 2010 which now allows tax reliefs under UK law on gifts to European charities on the same basis as for UK charities.
Unless you subscribe to the theory that local domestic supervision cannot be trusted to supervise charities, then the way that we do things now just lays another burden of bureaucracy on charities with international donors, which reduces the amount of the funds they have to undertake the very charitable functions which they are there to provide. Having an international charity doing wonderful work but being forced to operate with separate administrative entities purely to satisfy tax gatherers may have been quite understandable when we were living in the very different world of the 1950s , when the Dreyfus case was heard, but is it necessary now?
There is some recognition of the unattractive nature of this interaction because there are some ways in practical terms whereby (looking at the UK/US position) it is possible to break the barriers down. The Charities Aid Foundation has an arm called CADAF where a UK donor, wishing to give to a US charity, can give to that body and get UK tax relief and CADAF will take responsibility and authority to give the money as desired to the US charity. In the other direction, I have come across organisations in the US which will facilitate gifts in the opposite direction across the Duck Pond (otherwise known as the Atlantic Ocean!) But fees are payable, so it is not a perfect option. And this complication is necessary apparently, where the US definition of Charity has exactly the same source as the UK!
Governments are now co-operating earnestly to look at international global tax issues built round the spectre of avoidance, but they should not forget that the tension between tax systems in the case of cross-border issues is not new.. The difference is that the pressure was geared around accepting that tax systems, built up domestically, ended up with taxpayers who were exposed to two different regimes being liable for taxes in both States, and it was inequitable. That is why we have a system of Double Tax Treaties (note that they were never called Anti-Avoidance Treaties!).
This co-operation has to work on a mutual respect for each country’s individual tax regime, cobbled together, if the UK’s is any guide, by very little recognisable principle, and a lot of political compromises, but recognising the essential nature of the national economy in terms of who can and should pay. Deep philosophical debate is rare to find! But if one nation can operate with a respect for the next nation’s system, would it not show a disrespect if other areas of that country’s system, and charities is an obvious example, were not similarly treated?
In a global world, what we mean by charitable giving in different societies is bound to be marginally different, but that difference is eroding as we all interact more frequently with the ease of communication ( both physical and in the written or transmitted word). If (as is the case) domestic tax rules do not forbid, indeed they are at worse neutral, in the giving of international aid to those who are less privileged than us, then there is no logic which requires restriction on charitable giving between nationals of countries which share that ethos. Why could there not be a Convention, to which countries could subscribe, which laid down a common set of minimum standards of supervision and of common charitable definitions, from which the way in which the UK dealt with the Persche ruling could expand internationally? This might start with a limited acceptance in Europe and the US to start with, but surely it could soon extend round the Globe.
If nations want to try and harmonise their tax systems to accept inevitable globalisation, could this not be a positive and inspiring initiative which would provide real benefit to the very people who need the charitable benefit that more fortunate countries and taxpayers are able to provide?