Tax incentives for social investment: notes from Brazil

 

Andrés Thompson

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Andres Thompson

Andrés Thompson

Whether tax incentives for promoting private social investment and philanthropy are a useful tool or not has been a matter of debate and controversy in recent years in Latin America and beyond. The case of Brazil shows that tax incentives have great potential but with many implications that require us to look beyond the money involved.

Economists and observers of the world of philanthropy and social investment worldwide usually have a very positive view of the role of tax incentives to increase the size of corporate and individual giving for non-profit organizations. These mechanisms are under permanent scrutiny and improvement in most ‘developed’ countries. But does the same apply for ‘developing’ countries? Beyond increasing the size of giving, what are the other implications behind these incentive laws?

I have been recently involved in a research project trying to understand how the world of non-profits with a focus on sports (in particular, football/soccer) and development operate in Brazil, including their relationship with public policies, funding and knowledge generation. After a first overview, it is evident that the Brazilian state grants several federal tax exemptions (revenues, social contributions, social security, etc.) to the several categories of non-profit organizations, thus alleviating their finances.

Regarding tax incentives for donations, there are also several laws and mechanisms in place with focus on arts and culture; children and youth; the elderly; and sports. For sports in particular, under Law 11,438/06 ruled by Decree nº 6,180/07 (‘Lei do Incentivo ao Esporte’), projects approved by the Ministry of Sports can receive sponsorships and donations from companies and individuals, although all projects must be approved by a Technical Commission from the Ministry before receiving donations or sponsorships.

Individuals may – totally or partially – deduct the amount invested from their income tax up to a limit of 6%, and companies may deduct up to a limit of 1% (or up to 6% in culture). Donations and sponsorships that directly or indirectly benefit companies or individuals that maintain relations with the donor or the respective sponsor may not be deductible. Projects combining education and sports must involve at least 50% of students from public schools of the surrounding area where they will be held. Donations include: a) free transfer of money, goods and services for projects (though not for publicity) concerning sporting and ‘para-sporting’ activities; and b) free distribution of tickets to sporting and ‘para-sporting’ events by companies, to their employees or to needy communities.

The maximum deductible value is annually fixed by the Executive Power, based on applicable corporate and individual tax rates. Through this mechanism, a total of €178.5 million has been distributed by 1,100 companies to a variety of projects during the period 2007-2010 – this is clearly a significant amount of money.

Looking beyond the numbers is where the concerns arise:

  • 70% of the amount has been invested in high-performance sports and not in educational sports.
  • There is no formal mechanism of accountability about the purpose and recipient of the donations. It is up to each company whether or not they bring that information to the public. The large majority do not inform.
  • Those companies that do inform do not make the distinction between ‘genuine’ donations and ‘tax incentive’ donations.
  • Donations to sports are considerably small when compared to arts and culture.
  • Donations to institutions created by the donor are allowed in the cultural tax incentive law (Lei Rouanet), but not in the case of sports.
  • While in the field of culture it is allowed to support individual artists, the sports law does not allow direct funding of professional sportsmen and women.

So, tax incentives for social investments cannot be reduced to simply passing legislation. They also necessarily need to consider the alignment with other public policies related to the field of non-profit/government relations, mechanisms of transparency and accountability in the distribution of donations, capacity building for non-profits to have access to those resources, prioritizing social issues (in this case, high-performance sports versus culture) and the like. Some of these issues will be discussed during the GIFE conference in Brazil this month.

Isn’t it time that social investors think more comprehensively when asking for more tax incentives to give? Otherwise, they can risk becoming like a boomerang, facilitating corruption and waste of resources.

Andrés Thompson is currently the general manager of streetfootballworld in Brazil

Tagged in: Brazil Individual donations Social investment Tax deductions Tax incentives


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