By Wang Biqiang
Published: 2008-02-19

From News, page 3, issue no.353-354, Feb. 4-11
Translated by Zuo Maohong
Original article:

To contribute 250 million yuan to the state treasury, or to invest in 1,000 elementary schools in the countryside? The newly implemented Enterprise Income Tax Law has chosen the former.

According to the Law, which took effect on January 1, 2008, non-profit organizations must pay a 25% tax on their operating income (income derived from investments), adding huge financial pressure to those domestic groups working on minjian or "civil society" issues in China. As the major backers for domestic charity work, public-interest foundations would be hardest hit by the new law.

Sources from the National Committee of the Chinese People's Political Consultative Conference (CPPCC) revealed that suggestions to abolish taxes on non-profit fund's operational income would be made to the National People's Congress and CPPCC in March. Meanwhile, sources close to the State Administration of Taxation said the issue was under study and related policies might be released in the future.

A Field Trip to the State Treasury
Non-governmental foundations have been generally weak in China. Statistics from Ministry of Civil Affairs showed that assets of the approximately 1,200 foundations in the country totaled 1.25 billion dollars in 2006, a fraction of the 65 billion-dollars worth of capital managed by the US-based Bill & Melinda Gates Foundation.

According to calculations by Xu Yongguang, a member of the National Committee of CPPCC, even if total yields of foundations average 10% per year, their yearly income would still be under 1 billion yuan, one fourth of which would be paid to the state treasury according to the new rules.

"Compared with state revenues, which amounts to six to seven trillion yuan each year, 250 million is a trifling sum. If we say 250,000 yuan is needed to build one new charity school, then paying 250 million yuan to the state treasury means losing the chance to build 1,000 schools," said Xu.
Since founding the "Hope Project" in 1989, he has helped build some 13,000 schools.

"The project has received 3.6 billion yuan in donations by far, which is only adequate for building five kilometers of subway in Shanghai. But what it contributes to society spiritually, morally, and culturally can't be simply measured by an amount of money," said Xu.

The Narada Foundation, which Xu is now in charge of, has been funded through donations by private organizations and individuals.

Founded last May with an initial registered capital of 100 million yuan from the Shanghai Narada Group, the Foundation spent a total of 6.17 million yuan in the second half of 2007 on its "New Citizen Project"--education aid for children of blue-collar workers.

The Foundation made ten million yuan from investments in the past year, necessitating a three million yuan tax payment according to the new Law.

Yao Wen, assistant to the financial director of the China Youth Development Foundation (CYDF), told the EO that CYDF made 20 million yuan in profit 2007. Based on the former 33% tax rate on enterprise income, the Foundation has to pay some seven million yuan in taxation.

"How many charity schools can be built with seven million yuan?" he asked.

A Paradox of Charity
Wu Ming, director of Legislative Affairs Office of Ministry of Civil Affairs, said it's illogical to levy taxes on foundations using the same standard that's applied to normal companies.

He noted that non-profit organizations were dedicated to retaining and increasing public assets. In other words, their funding stemmed from public donation and would return to public interest undertakings, which distinguished them from companies.

Although there were professionals who worked in foundations to retain and increase funds raised from the public via investments, the ultimate goal of such operations—charity work-- was different from those of companies, said Wu.

Wang Rupeng, secretary general of the Chinese Red Cross Foundation, agreed, and said, "the government taxes us and distributes the money to charity school projects, which in turn distributes the fund to education and sanitation—how high is the cost during this process?" According to him, the government did not work efficiently enough in charity projects, and would be better off letting more efficient charity organizations do the job instead.

Wu Yuzhang, a researcher at Chinese Academy of Social Sciences, pointed out another difference—that on the one hand, donations by businesses within 12% of the total annual profit would allow a tax deduction, meanwhile, public-interest organizations had to pay a 25% tax on their operating income.

According to Jin Jingping, one of the drafters of the Charity Law, many countries had adopted preferential tax policies for foundations, for example, US private foundations only needed to pay a consumption tax approximately one to two percent of their net investment income.

An official who was involved in drafting the Enterprise Tax Law admitted that it's inappropriate to apply corporate tax requirements on these kinds of foundations and other entities, and explained, "maybe it's because the Ministry of Finance and the State Bureau of Taxation don't know enough about public-interest projects, and it's hard for tax regulators to tell which part of their income is spent on public welfare."

The official also noted that there were organizations making profits through non-charity activities under the banner of public welfare. To prevent this, the current laws have been based on the "presumption of guilt" in criminal law.

Suggestions to Abolish the Tax
Wang Rupeng described Narada Foundation's willing payment of a three million yuan tax as "tragically heroic". As head of the Foundation, Xu said it did so in the hope of drawing attention to the issue from related departments and society as a whole.

Both Xu and Wang Ming, another member of National Committee of the CPPCC, claimed that they would propose to the two political conferences in March that the rules should either be abolished or replaced by more reasonable policies.

Foundations including CYDF and Narada said that in the mean time, they were pursuing the issue together with tax and civil affairs departments.

"The problem has to be solved before the end of the year," said Jin, who added that according to tax regulations, tax payers must compile their tax returns before April 30th, 2009. Foundations would not be able to cast accounts for 2008 if the issue was not solved in time.
Wang did have some positive news--that some government departments have been studying the definition of "public welfare undertakings".