Tax implications of the now compulsory CSR
Over the past two or so years, we have seen a number of new laws being enacted, some of which indirectly impact on taxation. Accordingly, regulatory changes play a significant part in the operations of corporates, and it is vital that businesses remain updated of such changes to ensure that they do not infringe any of the laws. Following the promulgation of the Citizen Inclusion Act (CIA), it is of paramount importance to note that private businesses are now required, by law, to make mandatory donations through Corporate Social Responsibility programs (CSR). Such ground-breaking regulatory obligation brings about a quandary whether mandatory donations under the CIA are deductible expenses for income tax purposes.
The mandatory CSR
Firstly, let us briefly have a look at the mandatory donations prescribed by the CIA. In verbatim the said Act states that, ‘A private sector enterprise shall devote part of its profit to corporate social investment of communities comprising of disadvantaged targeted citizens.’ Accordingly, it is apparent that the said provision makes it mandatory for profit-making private entities to dedicate a portion of their profits towards social development in the communities they operate from. The CIA only requires mandatory donations where a private enterprise is in a profit-making position, tacitly taking away the CSR for loss-making private enterprises. Further, it is yet to be clarified who a ‘disadvantaged targeted citizen’ really is but in our view, orphans, the underprivileged and destitute undoubtedly fall within the ambit of such term. Now, the main issue of contention is whether such donations are recognised by the Income Tax Act and whether BURS’ approval is necessary.
Enter Income Tax
Donations are generally regarded as voluntary expenditure for philanthropic endeavours which are not related to the production of business income and are therefore not allowed as tax deductions. However, regardless
of the stated strict tax treatment, the Income Tax Act allows a deduction of specific donations of at least P1,000 per annum made to, but not limited to, schools, approved sports clubs, hospitals etc, which must be approved by the respective ministry and BURS. Legally, the CSR expenditure under the CIA is made mandatory by a law which turns the ‘donations’ aspect to a ‘legislative obligation’ and therefore negates pre-approvals of the donees. Technically, failure to comply with the CIA provisions is an act of non-compliance. Therefore, such donations appear to be necessarily incurred in the production of income and must be allowed as tax deductions.
Where tax laws conjure divergent views or interpretations, precedent case law becomes handy in determining the correct and most rational treatment. In this case, if we borrow arguments and dicta averred in one Tsetseng Investments v BURS case, it is prudent to state that the said mandatory donations must then be deducted for tax purposes even without preapprovals approval. In the said case, BURS argued that training levy, a tax paid in terms of the Training Levy Order of 2008 was not tax deductible but Tsetseng argued otherwise. Accordingly, BURS lost in that case as the training levy is a compulsory expense, just like audit fees.
Now, to bring everything into perspective, it is apparent that private corporates are now obliged by the CIA, to compulsorily part away with a portion of their profits which technically makes the said CSR donations a compulsory expense just like audit fees or training levy as contemplated in the Tsetseng case.
Conclusion
Based on the provisions of section 39(2) of the Income Tax Act which allow deduction of expenses where there is a legal liability to pay for the expenses, the CSR donations under the CIA certainly qualify as obligatory expenses as they are imposed by law. In that vein, private businesses must therefore be able to claim a tax deduction on such expenses, which are imposed upon them by the CIA, as long as the donations are made to disadvantaged targeted citizens.
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