Thursday 23rd February 2012

Structuring CSR Activities Of A Corporate Entity To Achieve Tax Benefits

By Chris Engola Otyek

Many companies are increasingly embracing the concept of Corporate Social Responsibility (CSR) in their business modules.  Various reasons have been advanced to justify their involvement in CSR activities ranging from obtaining brand visibility and differentiation to the belief that CSR enhances company credibility in the community where the company operates.

For others, it is the conviction to give back to the communities where they operate on purely moral, ethical and humanitarian basis with the company expecting ‘no gain’ for engaging in these activities. This reminds me of the common practice that I have encountered especially amongst the youth. After receiving their first salary, they take gifts in various forms as a token of appreciation to those that they felt were very instrumental in their lives and are responsible for their achievements.

Huge sums paid out in CSR. Is it worth it?
CSR has blossomed as an idea --- if not as a coherent practical programme --- with companies engaging in activities which have taken the form of provision of health services, shelter and education, campaigns for the eradication of malaria among others. Huge sums of money are paid out by companies that are now beginning to appreciate that they do not operate in a vacuum and that they should be responsive to the host community in which they operate.

If the dictates of public policy and morals as a means of survival in today’s business world demand that a company which has made profits should give back to the society because it is the right thing to, is this not a departure from the norm that a company’s predominant purpose is to stick to its core business and maximize profits for its shareholders? Wouldn’t spending shareholders monies in charitable activities reduce their dividends?  Is there really a place for charity in the board room of directors if there is no benefit that will accrue to the company from CSR activities?  Perhaps a discussion for another day, but companies might want to consider putting charity in its proper place by choosing the right corporate structure to drive CSR activities.

Choose right structure to channel CSR
The choice of organization that one should set up should be informed by the type of activities the organization is desirous of carrying out and the tax benefits that may accrue. A company limited by guarantee and incorporated to carry out charitable activities may not easily get a tax exemption because of its very inherent nature as a company regulated under the Companies Act, which is often perceived as having the mindset of profits. Such a company might have an onerous task in convincing the tax authorities that it is entitled to a tax exemption status.
This might not be the case for a Non Governmental Organization (NGO) that is regulated under a completely difference legal regime which by its inherent nature is tailored to drive charitable activities. The NGO can easily leverage support from the NGO Board for recommendations to relevant government authorities on matters such as employment of non-citizens by the organization and exemption of taxes and duties.  

To maintain the goodwill that the company has acquired, the NGO should carry a similar name with the company for the public to discern that its affiliated to the company.

Tax deduction on CSR is restricted
Under the Income Tax Act, a company engaged in CSR activities is only allowed a deduction to its chargeable income of the value of the gift or donation that it makes to an exempt organization. The deduction must not exceed 5% of the Company’s chargeable income for that year.

A company can only take benefit from this deduction if it is making charitable donations to an exempt organization which has a written ruling from the Commissioner of URA. Once the tax exempt status is attained, all incomes derived by the organization which are applied exclusively for the activities of the organization or the function constituting the basis for the Organizations existence, would be exempt from tax. 

Through this structure, the company can use the organization to independently fundraise for CSR projects and activities as a charitable organisation and to attract donors who can benefit from the deductions from the charitable donations made. The company would also absolve itself of all liabilities and legal risks associated with CSR activities as the NGO will be a separate legal entity from the company. Charity will be put in its rightful place, brand visibility and a double tax benefit will be attained. 

The writer is an Associate with Sebalu & Lule Advocates