Taxes – the Pandora’s box for nonprofits that we’re going to open in this article. You may have started to read this expecting a different topic and that’s understandable. After all, the nonprofit world is full of tacit complexities. However, today’s focus is on a particularly complex issue, one that I believe could lead to significant reputational damage for non-governmental organizations in the future if not addressed. Why? Because it is not always about paying what is due or filling out a form.
To put it simply, a clear and consistent policy, standard or approach to taxes is something that many NGOs don’t have and don’t know how to implement. When discussing taxes with a nonprofit, it’s like opening Pandora’s box – a combination of unexpected challenges and complex situations that could herald misfortune and trouble ahead.
Typically, we (in NGOs ) handle these tax issues on a day-to-day basis: consulting lawyers, checking with HR, seeking advice through our networks, calling acquaintances for guidance, referring to headquarters, or citing specific legal provisions. This approach works for day-to-day operations which keeps things running. However, when we move beyond these immediate solutions to a more strategic viewpoint, focusing on transparency, auditing and compliance, we find ourselves facing unforeseen problems and numerous unresolved issues that might crop up in the future.
It’s more complicated than you think
When it comes to taxes and NGOs, it’s anything but simple. Every NGO faces its own set of tax rules which can change a great deal from one location to another. For example, a non-governmental organization in one country might not have to pay certain taxes but, just across the border, the rules could be totally different, especially if you are an international NGO.
Each country has its own unique way of dealing with tax regimes for nonprofits. Some countries let NGOs off the hook for certain taxes like income tax but, even then, NGOs might still need to pay Value Added Tax which is added to the items they buy. Some countries or laws regulate NGOs under third-sector rules while others apply NGO law. Sometimes nonprofits pay taxes directly, sometimes their donors cover this based on the grant involved and, in many cases, the rules about taxes are so vague that it’s not very clear what the tax means, especially when it’s associated with properties and access or when it is not a state/government tax but a “tax” imposed by an armed group or in a location that is not under government control.
Does this run the risk of being terrorist financing? This is what donors and governments might ask you as an NGO and you have to think about this carefully.
I know, this makes things really tricky, especially for organizations working in more than one country and in different operational settings which unfortunately means that NGOs are forced to juggle all the different tax rules by implementing a basic policy to handle taxes or establish a guideline stating that taxes will be paid as and when necessary or try to create an SoP/guideline for each country. But the finer details – like how to do it, the principles and standards required, what paperwork is needed, and how to align this with their financial systems – are often not clear. It’s as though they’re just working it out as they go along which might be okay for now, but what about later?
It’s not just about paying taxes
I know it might sound simple, and you might think this issue is just about following rules and filling out forms, but dealing with all these tax rules isn’t just about paying what is due or not; it can also be risky. The question goes beyond payment, it’s also about how NGOs manage their tax obligations which significantly influences public perception. How they navigate tax complexities can shape their reputation and credibility in both local operations and on the global stage.
Plus, there’s another big question: How should NGOs handle taxes and still stay true to their mission and humanitarian standards? For instance, when NGOs operate in areas that are not controlled by a government, they may encounter different rules imposed by armed groups. We’ve seen this happen in multiple contexts, such as in Afghanistan before 2021 when the Taliban controlled several areas, in North-East Syria, Yemen, and numerous other regions. These groups might demand payments under the guise of ‘taxes’ to allow NGOs access to certain areas. NGOs then face a dilemma: if they pay these so-called taxes, they will then be able to access the area to provide aid, but they might also be indirectly supporting the armed group. On the other hand, not paying what is demanded could mean they can’t help those in need in these areas. This situation tests an NGO’s commitment to its mission and humanitarian standards while navigating complex and potentially ethically challenging situations.
But there are also scenarios where it goes beyond a straightforward dilemma when an NGO engages in a business-like activity and this activity brings profits but it is not taxed. For example, when an NGO conducts training sessions that generate income or it leads a livelihood income generation project, and the revenue is initially paid to the organization to then be redistributed to individuals, the tax implications become more complex. These activities blur the lines between nonprofit and commercial endeavors, complicating the NGO’s tax situation. Additionally, when nonprofits take on commercial contracts, they open yet another complex chapter in their tax story, further challenging their ability to navigate the tax landscape.
So, what can NGOs do about this mess?
Unfortunately, this article isn’t going to provide a step-by-step guide or a template for a policy or clear plan. Instead, it’s about raising awareness of an issue that might seem simple but could become quite serious in the future. It’s about flagging up a concern for you to consider and perhaps discuss with your colleagues, or to share as an intriguing article that might inspire action in others.
The first step might be to establish a tax policy or statement. This means your organization should set clear rules, standards, and perhaps issue a statement on how taxes are handled wherever you operate. It’s not just about following the law, it’s also about honesty and transparency for supporters and beneficiaries.
NGO taxes aren’t just about paying what’s due, it’s about finding the right balance – adhering to the law, keeping the organization functioning, and staying true to the cause in a smart and ethical way.
