TAX LAW UPDATE: WHAT NOT-FOR-PROFITS STAKEHOLDERS NEED TO UNDERSTAND ABOUT TAXATION OF CHARITABLE ORGANISATIONS
- Difference between a ‘charitable’ or ‘religious’ organization status, for tax purposes, versus being registered as a charitable or religious organizations.
- Uncovering the requirements set under the law for a Not-For-Profit to be recognized as a ‘charitable’ or ‘religious’ organizations for tax purposes.
- Effect of being granted a Charitable Status Ruling to that effect, from the Commissioner General (TRA).
- Not-For-Profits’ Memorandum and Articles of Association (MEMARTS) or Constitution; and financial statements should indicate that they conduct a charitable business.
The Court of Appeal of Tanzania (CAT) has recently reaffirmed the position in the law regarding taxation of charitable organizations in Tanzania. The decision was made in the case of The School of St. Jude Limited vs Commissioner General (TRA), Civil Appeal No. 21 of 2018 (St. Jude’s case). The tax department at Breakthrough Attorneys, while analyzing the same, has decided to prepare this article for Not-For-Profits stakeholders and general public to be informed of the taxation of charitable organisations.
1.1 Meaning of Not-For-Profits
The word ‘Not-For-Profits’ refer to organizations which do not earn profits, for its owners. Examples of not-for-profits are organizations such as companies limited by guarantee, societies, non-governmental organizations which were registered to conduct business, however that business is not for the profits of the owners. In these kinds of organizations, all of the money earned by or donated to them is used in pursuing the organization’s objectives and keeping them running.
2.0 Legislation Under Focus
- The Income Tax Act, 2004 [Cap 332] (Income Tax Act)
- Tax Administration Act, 2015 (Tax Administration Act)
3.0 Tax Treatment of Charitable Organizations as per the Income Tax Act, 2004
Not-For-Profits should be considered as conducting a business with respect to its functions if it fits into the technical meaning provided in Section 64(8). Otherwise they will be considered as carrying out business with a view of delivering profit, just like in St. Jude’s case (see 4.0 below).
Section 64(8) (a)-(c) provides for the requirements that Not-For-Profits should meet so as to be recognized as a ‘charitable’ or ‘religious’ organizations for tax purposes. The provision provides for the term “charitable organisation” to mean, a resident entity of a public character that satisfies the following conditions:
- The entity was established and functions solely as an organisation for (i) the relief of poverty or distress of the public; (ii) the advancement of education; or (iii) the provision of general public health, education, water or road construction or maintenance; and
- The entity has been issued with a ruling by the Commissioner under Section 11 of the Tax Administration Act.
- Currently in force stating that it is a charitable organisation or religious organisation.
4.0 Decision of the Court of Appeal of Tanzania (CAT) in Civil Appeal No. 21 of 2018: The School of St. Jude Limited vs Commissioner General (TRA).
In this Appeal, the Appellant was dissatisfied with the decision of the Tax Revenue Appeals Tribunal (TRAT), which upheld the decision of the Tax Revenue Appeals Board (TRAB). It was decided that, despite being registered as a company limited by guarantee and providing free education to 96% of the enrolled students – the Appellant was not conducting charitable business
4.1 Arguments by the Appellant
It was argued by the Appellant that, the Appellant is registered as a company limited by guarantee, not having a share capital and it provides free education to 96% of the enrolled using donation and sponsorships. Hence conducting charitable business.
4.2 Arguments by the Respondent
The Respondent, in reply argued that, the Appellant’s income is taxable. That, the Appellant was doing business of training students whose school fees are covered by third parties by a way of donations, sponsorships, visitors’ income, miscellaneous income. Also that, the Appellant earns other income from bank interests as well as from few students whose fees are paid by their parents. Therefore, chargeable to chargeable to tax.
4.3 Decision of the Court of Appeal (CAT)
Before rendering its decision, the CAT took note of the facts that, (i) the Appellant is a company limited by guarantee; (ii) the Appellant applied to the Commissioner General but was not granted Commissioner’s Ruling under Section 131 (1) of the Income Tax Act, 2004.
With that, the main argument before the Court was whether the Appellant is not carrying out its business with a view of delivering profit. On that, the CAT agreed with the findings of the Tax Revenue Appeals Tribunal that – the Appellant was not conducting charitable business. That, the free education was paid by third parties and so surplus shown in the Appellant’s bank statement is a profit from business. That, the same is therefore chargeable to tax.
5.0 Analysis of the Decision of the Court of Appeal
We Breakthrough Attorneys are of the view that, the decision of the CAT is in line with the law. It should be noted that, CAT has not restricted Not-For-Profits from being recognized as ‘charitable’ or ‘religious’ organizations or conducting charitable business. What Not-For-Profits should do is to be compliant with the law and meet all requirements provided for under Section 64(8) of the Income Tax Act, 2004.
A Not-For-Profits which is in need of tax treatment, as a ‘charitable’ or ‘religious’ organization – should make an application for charitable status ruling, to the Commissioner General (TRA). That application should align with Section 11 of the Tax Administration, 2015. Along with the application for charitable tax ruling, Not-For-Profits should submit all evidences proving that they conducts charitable business. Including, a Memorandum and Articles of Association (MEMARTS) or Constitution financial statements, previous projects reports, all previous income records.
After being granted the ruling and be compliant to other conditions provided for under section 64(8), Not-For-Profits will qualify for charitable status tax treatment. It is also advised that, Not-For-Profits should at all times be compliant to tax law, with good tax compliance records. Not-For-Profits should also make sure that they have cleared all previous tax obligations and must continue to be a complying taxpayer.
Breakthrough Attorneys will continue to keep the taxpayers, the general public and other interested stakeholders updated on the interpretation and applicability of the provisions of tax law in order to propagate due compliance with tax legislation.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.