Japanese tax reforms encourage future philanthropy
I received an interesting email today; quite possibly third hand, through the various email forums I subscribe to. It was from the Public Interest Corporation Commission (PICC) in Japan – Japan’s equivalent to the Charity Commission here in the UK. It was a very brief statement by its commissioner, claiming that recent tax reforms in Japan would help to make Japanese people more philanthropic. I must admit, it wasn’t something I had thought about before – whether Japanese people are generous donors or indeed what proportion of Japanese charity income comes from such donations?
So I did some digging. I thought I’d share with you some of the things I found out, as it reminded me that not everything is always as it seems. Or perhaps the lesson is that just because a country is a wealthy and developed one, does not mean it has a mature third sector…I learnt this lesson about most of Europe a long time ago!
Japan is generally seen (despite being a communitarian-orientated society) as having a surprisingly weak civil society compared to other developed countries. This is largely due to the domineering influence of the state in many areas of society including the economy. However, in the past 16 years, the Japanese authorities have been ’embarrassed’ into action twice. Once was by the rapid response of civil society organisations (in comparison to the central government) after the Kobe earthquake in 1995, which resulted in a first round of changes to NPO law to encourage giving. However, these weren’t considered particularly effective.
More recently, prior to the devastating natural disasters in 2011, there was already cross-party discussion on the need for a new NPO law. According to some, the passage of the law was looking touch and go due to the political divide leading up the earthquake. Yet while that divide still exists, given the role of NPOs in the response to the recent disasters in Japan all parties realised that waiting any longer could have a significant impact upon the ongoing recovery.
So what has actually changed? Well, through The National Diet of Japan (parliament) a bill has been passed that offers those donating to NPOs more favourable treatment in the tax system, as well as making NPO certification for tax deduction purposes much easier than it has been previously.
In terms of NPO certification, responsibility for certifying NPOs for tax deduction purposes has now moved from the National Tax Agency to local municipalities, thereby speeding up the certification process. An additional criterion has also been added. Currently an organisation needs to receive more than 1/5th of its income in the form of donations for its donors to be considered for preferential tax treatment (the ‘public support test’). However, now an organisation may be considered eligible for NPO tax deduction status if more than 100 people have donated more than 3000 yen to the organisation.
This is important because either of these criteria may be used as the basis for certification. According to one observer, “these changes alone are expected to help the estimated 43,000 NPOs in Japan acquire this certification” – where it is estimated that less than 215 of these NPOs have acquired this preferential treatment until now. That’s quite an improvement!
The way that income and tax liabilities are treated when a person donates to an NPO have also changed for the better. Previously, the only way to reduce your tax burden through donations was through the ‘taxable income deduction’ approach. This new law allows a donor to choose to receive a tax credit of 50% of donations up to 25% of their income (40% of the donation coming off the income tax bill, with 10% coming off the municipal tax bill). It is hoped this will incentivise people from middle and lower income groups to donate to NPOs, particularly as the previous system favoured higher income earners. As a result, both methods will now be available.
It’s quite astonishing to think that such a wealthy, developed and powerful country such as Japan has been languishing on the tax reform scrap heap for so long; alongside many of our own European neighbours I might add. Yet it does show that reform, when it does come, has the ability to transform a society’s philanthropic behaviour. From Japan’s point of view, they’ve been taught a very humbling lesson on the power of global philanthropy and I just hope that this is the beginning of Japan’s evolution into a more open, generous and mature charitable sector, both internally and around the world. But, as with most things…only time will tell.