organisations and faith-based organisations.

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1 Recommendations for improving the legal, fiscal and funding framework for an accountable, transparent and effective civil society sector in Trinidad and Tobago 1 February 2016 Vision An accountable and transparent civil society sector in Trinidad and Tobago that can play an effective role in the country s development through development of a legal and fiscal framework designed to reduce unnecessary bureaucracy, stimulate corporate and individual giving. Key points Civil society organisations (CSOs) make a vital contribution to the economic, social and environmental wellbeing of Trinidad and Tobago. Yet the current legal and fiscal framework does little to encourage this; on the contrary, it is incoherent, confusing, inequitable and actually serves as a disincentive to a CSO becoming a legal entity. The current framework involves government in unnecessary bureaucracy to levy illogical taxes, provides few or too cumbersome fiscal incentives for individual or corporate giving, and does little to stimulate real transparency and accountability in the non-profit sector. Changing the law would therefore benefit not only CSOs but also the government, the private sector and individual philanthropists. This could be accomplished quite rapidly by basing new legislation on tried and tested models, such as the Belize Non-Governmental Organizations (NGO) Act No.26 of New legislation should grant CSOs exemption from all taxes but require them to file simple annual returns, for example, accounts for the financial year (which should be audited if income exceeds an agreed sum) and list of directors. This would contribute to transparency and accountability and improve statistical analysis of the number of CSOs and their contribution to society. Pending the change in the law, all non-profit companies that have filed annual returns of directors should be granted exemption from corporation tax and Green Fund levy. Once new legislation is in place, all CSOs should be required to be legally registered to encourage greater transparency and accountability. A review of government funding of CSOs, including subventions and grant programmes, is needed to improve effectiveness and efficiency. 1. Context Civil society organisations 2 (CSOs) make a vital contribution to the economic, social and environmental wellbeing of Trinidad and Tobago. They play a critical role in implementing national policy and provide 1 The development of this Brief was a collaborative effort involving Veni Apwann, the Caribbean Natural Resources Institute (CANARI), Nature Seekers, the Adult Literacy Tutors Association and SHIFT!. Further input was gained from 37 representatives of 24 Civil Society Organisations who attended a meeting on 22 July 2015 to discuss the issues and comment on an earlier version of this document that had been circulated in advance. 2 The term civil society organisation encompasses non-governmental organisations, community-based organisations and faith-based organisations. 1

2 many services that government agencies lack the human and financial resources to supply. Examples range from tutoring in adult literacy and parenting, to prisoner rehabilitation and integration back into society, to environmental conservation and monitoring, to cite just a few. Yet, unlike the private sector or their counterparts in countries such as the United States and United Kingdom, the majority of CSOs do not benefit from tax incentives or exemptions, even if they are legally registered as non-profit companies. Estimates of the total number of CSOs in Trinidad and Tobago vary widely, but it is certainly in the thousands. Yet a mere 163 CSOs received government subsidies in The Ministry of Finance reported only 452 organisations in 2013 as having charitable status and therefore exempted from paying corporation tax. Conversely, in 2014 there were 5,284 non-profit companies on record that had been incorporated or continued under the Companies Act (Ministry of Legal Affairs representative, Personal Communication, 5 September 2014), which were therefore liable to pay corporation tax and Green Fund levy. Many of these are not active. 2. Current legal and fiscal framework 2.1. Registration with a Ministry The majority of non-profit organisations, and particularly community-based organisations, simply register with a government Ministry, most commonly the Ministry of Community Development or the Ministry of Sport. While this does not grant the organisation any legal status, many international and government agencies and companies will still fund them. Banks will also open an account for a CSO based on this type of registration Acquiring legal entity status There are two ways in which a non-profit can become a legal entity in Trinidad and Tobago - by an Act of Parliament (now rarely used) or by registering as a non-profit company under the Companies Act Fiscal obligations of legally registered non-profits Although registering as a non-profit company is a fairly simple process, the fiscal implications of doing so are onerous since non-profit companies: are liable to pay corporation tax (currently at a rate of 25%) on whatever chargeable profit they report at the end of their financial year. have been considered liable for the Green Fund levy on turnover (sometimes also defined as gross sales and receipts), although the Green Fund was originally intended as a levy on for-profit companies to support non-profits doing environmental conservation work; should register for Value Added Tax (VAT) if their turnover is over TT$300,000 (although this seems to be rarely enforced and even Board of Inland revenue has issued contradictory statements on the matter); 2

3 Why talking about chargeable profit and turnover makes little sense in the CSO context The turnover of a for-profit company is the total amount of money that comes into the company in a given period as a result of the sales of its products and services. Its gross profit is it turnover minus the costs of production, sales, marketing etc. After allowances, exemptions and incentives, a proportion of this gross profit is taxed, leaving a net profit that is available for distribution to shareholders. CSOs do not have a turnover in this sense. CSOs in Trinidad and Tobago derive their income from a variety of sources, with sale of goods or services generally representing a small or non-existent proportion; instead, the majority of their funding comes from subventions, grants, donations, fundraising events etc. CSOs also cannot make a profit and by definition have no shareholders. When their income exceeds their expenditure in a given period, this is known as a surplus money that cannot be distributed but must be ploughed back into the organisation to continue its work. It remains money that has been given for a specific purpose, often from taxpayer money (e.g. government subventions) or income that has already been taxed (e.g. individual donations). Surely, in such instances, it cannot be rational or fair to tax this surplus? For CSOs that use cash rather than accrual accounting (undoubtedly the majority of the smaller and newer organisations or those without auditors), the situation becomes even more complex. Imagine that a CSO receives a grant of $20,000 on 1 December but has only spent $2,000 of this by 31 December. At the end of that year, their books will look as if they have a surplus of $18,000 but in fact this money still technically belongs to the grantmaker until the CSO has accounted for the full $20,000 grant. Again, it cannot possibly be fair to charge tax or Green Fund levy on that sum. Failure to file taxes or annual returns of directors theoretically attracts significant interest and penalties, although to date this has rarely been applied and there have been several tax amnesties in recent years that applied equally to for- and non-profit companies. Many non-profit companies are in default of their tax reporting obligations, though the scale of this problem does not appear to have been quantified Exemption from corporation and other taxes Only profits from the following categories of non-profits are explicitly exempted in the Act from corporation tax: a co-operative society so registered under any written law in force in Trinidad and Tobago ; any sporting body of persons, that are approved by the President by writing under his hand, derived from public or private subscriptions or donations, whether by Deed of Covenant or otherwise, or derived from charges for admission to witness sporting events, or from the provision of refreshment, to patrons who witness sporting events ; any ecclesiastical, charitable or educational institution of a public character, approved by the President by writing under his hand in so far as such profits are not derived from a trade or business carried on by such institution. CSOs, whether legal entities or not, can theoretically gain exemption from corporation and certain other taxes and duties by applying to the Ministry of Finance and the Economy for charitable status. Once a non-profit has charitable status, for-profit companies and individuals can make tax-exempt covenanted donations. Charitable organizations are required to file audited financial statements to Budget Division, Ministry of Finance annually, failing which they can be deregistered. 3

4 In order to be considered for charitable status, the CSO must have been in operation for a year and supply: a Certificate of incorporation under the Companies Act 1995 or Act of Parliament as a Non-profit Company and Articles of Incorporation, if the organisation is incorporated; its Constitution and by-laws; its most recent audited financial statements. The other criteria for acceptance are less clear. The Ministry s website 3 states that: Charitable organisations are organisations that carry out charitable activities or exist exclusively for charitable purposes. They operate on a non-profit basis and may be incorporated or non-incorporated. Organisations involved in charitable, sporting or religious activities must be registered as 'Charitable Organisations' or 'Sporting Bodies' with the Ministry of Finance and the Economy to qualify for concessions such as tax and duty relief and motor vehicle tax waivers. However, this statement only serves to introduce a further element of confusion since the term charitable is not clearly defined anywhere. Moreover, even granting of charitable status does not confer recognition by all government-owned bodies. For example, TSTT, which is 51 per cent government owned, applies its own set of criteria in determining whether a non-profit is charitable and therefore merits preferential telephone and internet rates. Conversely, until the proposed enactment of new legislation, the gaming industry falls under the preferential tax regime accorded to sporting clubs (BIR representative, Personal Communication, 9 October 2014). However, even where charitable status has been secured, non-profits are still required to pay the Green Fund levy. 3. Conclusions and Recommendations The current legal and fiscal framework is confusing, inequitable and serves nobody s interests. Rather than encouraging CSOs to become legal entities and to operate in a transparent and accountable manner, it serves as a disincentive. It involves government in unnecessary bureaucracy to levy illogical taxes and provides few or too cumbersome fiscal incentives for individual or corporate giving. The following recommendations propose a framework designed to reduce unnecessary bureaucracy, stimulate corporate and individual giving, and develop an accountable and transparent non-profit sector in Trinidad and Tobago that can play an effective role in the country s development. a. Immediately exempt legally registered non-profit companies from paying corporation tax and Green Fund levy: As an immediate measure, pending development of new legislation, we suggest that all non-profit companies that have filed Directors returns and submit up to date audited accounts (and can therefore be considered to be active and accountable) be granted exemption from corporation tax and payment of Green Fund levy since it is illogical that the most transparent 3 for Charitable Organisation Status ect/gortt+web+content/ttconnect/business/role/anngo/lawsandtaxes/registering+for+charitable+organisatio n+status#2 4

5 and accountable organisations should be those that are most heavily penalised. The exemption could be based on an amnesty over a period long enough for new legislation to be in place before the amnesty ends. b. Develop new legislation to govern the non-profit sector: For the longer term, we suggest that representatives of relevant government agencies, CSOs and the accounting and auditing professions engage in a consultative process to develop a new and more enabling legal and fiscal framework designed to create greater transparency and accountability, reduce unnecessary bureaucracy and stimulate a climate of tax-efficient giving from both individual and corporate donors. The Belize Non-Governmental Organizations (NGO) Act No.26 of 2000, which was widely consulted on throughout the Caribbean, could serve as the model for a revised approach in Trinidad and Tobago, though a more comprehensive review of non-profit legislation worldwide could also be considered. The new legislation should grant CSOs exemption from all taxes but require them to file simple annual returns, both to improve statistical analysis of the number of CSOs and quantify their contribution to society. The legislation should define minimum standards in terms of non-profit governance structures, accountability (particularly in terms of reporting on the acquisition and use of funds) and transparency. c. Require legal registration of all non-profits once legislation is in place: Once new legislation is in place, the requirement to register should apply to all CSOs that wish to access government funding, in order to improve transparency and accountability. Similarly, the private sector would only be eligible for tax exemptions when funding registered CSOs. d. Review government funding mechanisms, particularly subventions and the Green Fund and other grant programmes: Finally, in order to optimise the use of taxpayer money, we recommend a comprehensive review of government funding mechanisms and related processes, and in particular the subvention regime. This should include discussion on how the subvention granting process can be made more transparent, what are appropriate criteria for receipt of a subvention, how subventions can be made more commensurate to the services being provided, and the requirements of the CSO in terms of accountability. An independent review of the effectiveness and efficiency of government-run grant programmes is also needed and especially of the Green Fund, given the very small number of approved grants to CSOs despite an extremely large available funding pool of over TT$3 billion. The review should take into consideration other existing grant funding available (for example via the GEF Small Grants Programme) to ensure that government funding is targeted to address key needs and gaps. There is also a need for discussion on how government agencies can reduce the current delays in paying for services and disbursing grants, since this has a significant negative impact on project and programme delivery and outcomes and jeopardises the financial stability of CSOs and their staff. 5