Two thirds of countries offer individual tax incentives on charity donations

The majority of countries offer tax incentives to businesses making donations compared to just two thirds offering incentives to individuals while rates of tax breaks vary around the world

Tax incentives from government encourage people and businesses to donate to charity however, they are targeted towards the wealthy, a study has concluded.

The study, carried out by Charities Aid Foundation (CAF), looks at 26 countries and investigates the way tax incentives are offered around the world. It showed people are more likely to have donated to charity in the last month if they live in a country that offers tax relief.

Excluding Saudi Arabia (because they have no income tax) and Nigeria (because they have no incentives), 19 out of the 24 nations offer incentives at 100% of the value of income tax.

For example in France, individuals are able to claim a 75% credit against tax liability on donations totalling up to €521 (£408). Incentives above the €521 threshold are calculated at 66% of the donation but limited at 20% of total taxable income.

In the UK there used to be a high minimum eligibility criterion, Gift Aid was only eligible on donations of £600 or more. It was then lowered to £250 before being wiped out in 2000 as part of a measure to boost people giving to charity, with the amount of money being given via Gift Aid now increasing by roughly 3% per year.

Individual donations and corporate donations are treated differently; with individual relief coming in the form of grossed-up donations and corporate reliefs coming in the form of tax deduction. As a result, individual donors have their donations topped up by 25% (with higher rate tax payers receiving a 20 or 25% deduction on top of this), meaning that the relief is passed on to the civil society organisation (CSO) rather than back to the donor. Companies, on the other hand, receive the full benefit of the relief.

In most cases, the key factors in determining the relative financial value of incentives are the rate of tax paid by the donor and the effective rate of relief from taxation offered as an incentive for giving. For wealthy donors, the effect of these two factors are exaggerated by paying a higher rate of tax; with the cost of giving falling significantly where gifts are fully deductible in high-tax countries.

Not all countries offer tax relief, two in three countries worldwide offer incentives, and when they do some put up major restrictions and barriers to people on moderate incomes being able to claim for tax relief at all.

For example, in the United States only those that itemise their tax returns are able to claim back for charitable donations.

It is also shown that regular basic taxpayers often have less access to generous incentives than wealthy individuals or companies.

Commenting on tax incentives, CAF international policy manager Adam Pickering, said: ‘Crucially, it is important that they are easy to understand, non-politicised and progressive. This means that governments should not cherry pick favourite causes, and that incentives should be just as generous to people on moderate incomes as they are to the wealthy and big businesses. If incentives are seen to be stacked in favour of an elite few, this could have a chilling effect on mass engagement in charitable giving in the long run.’

The study suggests to make tax incentive schemes easier there must be: equality of causes, equality of incentives, claiming incentives must be easy, low tax economies should offer greater incentives and where tax expenditure is limited government should resort to caps.

Donation States - An international comparison of the tax treatment of donations is available here.

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