Wednesday, January 4, 2023
Tax-Exempt Status and Associated Factors among Charitable Foundations in China
When I was a much younger and hungrier professor, I wrote an article about tax exempt organizations in China. My pre- or recently tenured self was feeling especially erudite so I christened the article with a ridiculously pompous title, appropriate to my membership in a learned society I guess. Sheeesh! Click on the link if you want to know the title, I am too embarrassed now to include it in bright light hyperlink. I was scheduled to present the pre-publication paper to an audience in Beijing in October 2001, but then 9/11 happened and the whole world changed in an instant.
Even in 2003, when I wrote the article, access to information -- especially from China or other authoritative states -- was difficult (at least for me). One thing is true, though. Information proliferates exponentially every day. Even North Korea won't be able to withstand the progress of online yakety-yak. Nowadays, Chinese nonprofit laws can be accessed with just a click of a mouse. I wish I had access to the article whose title is in the headline back then. It provides a nice summary of Chinese nonprofit law, some useful empirical data and supported conclusions. The world is truly getting smaller. Here is the Introduction to Tax-Exempt Status and Associated Factors among Charitable Foundations in China.
A charitable organization (CO) refers to a social organization designed to benefit the general public or a specific group of the community with educational, humanitarian, or religious activities. CO activities go beyond giving relief to the indigent, extending to the promotion of happiness and the support of many worthy causes. With social goals as parts of their mission, the activities of a CO go beyond giving relief to the indigent, as their actions can extend to include the promotion of happiness and the support of Sustainable Development Goals (SDGs) for society. These SDGs can be activities such as promoting health equity, employment opportunity, community security, responsible social practices, social equity, environmental protection, and natural resource conservation. Due to wide social supporting roles and participation, COs are playing an increasingly important and active role during the decision-making and the implementation process for social sustainability, in both the public and private sectors, as well as at both the national and international level. The contributions of COs, together with other nonprofit organizations, to sustainable social developments have been well recognized and acknowledged by both the academic community and international organizations.
COs are generally exempted from paying income or property taxes because these organizations perform functions of social welfare improvement, social equality enhancement, environmental protection, and other tasks for sustaining society that the government would normally have to perform. Therefore, the government is willing to forgo the tax revenue in return for the public interest services rendered by COs In addition, the tax-exempt status is justified because COs follow a non-distribution constraint principle. COs do not seek profit and can only maintain a surplus of revenue, if any, for work that is to provide a social benefit, rather than for distributing earnings to stakeholders, such as founders, members, employees, or anyone else in control
Tax exemption includes, specifically, exemption from taxes (e.g., value-added tax, customs fees), tax reductions for charitable organizations, and tax reductions for donors (who can deduct donations from their tax base). To be qualified for tax exemption, a CO must continue to pursue its mission and follow the non-distribution constraint principle. Tax exemption plays a very important role in the governmental financial support of the COs. It is included among the key factors of the legal environment and financial viability monitored by the United States Agency for International Development (USAID) when the sustainability of civil society sectors are evaluated.
Charity foundations (CFs) in China are a type of charitable organization, having the functions of both raising funds and operating projects for their mission, rather than focusing on accessing grants. Starting from the 1980s, through government financial subsidies, CFs in China have been growing at a rapid rate during the past decade with additional strong supports from social donations and private endowments]. The number of CFs has increased from 609 in 2003 to 7169 in 2020. While the governance and regulation of CFs in China is not yet well established, the occurrence and exposure of some major scandals about CF’s fundraising and management problems has severely harmed public trust and donation motivations. To address the public concerns, a higher level of transparency, accountability, and updated regulation of CFs was proposed and enacted in China. The first national Charity Law of China was passed and came into implementation in 2016. To encourage donations by individuals and organizations, the 2016 Charity Law of China strengthens the tax incentive by allowing deductible taxes to be carried forward for three years.
There are concerns that nonprofit organizations in China face additional barriers to gaining tax-exempt status or receiving benefits due to the incomplete provision of information and the low level of trust in the government. These difficulties and barriers may be extraordinarily strong for grassroots nonprofit organizations. Additionally, some scholars argued that nonprofit organizations in China often cannot classify income sources clearly; hence tax exemption and administration often cannot be implemented effectively. During the past five years, there has been a volume of literature studying the transparency and associated factors of CFs in China. More recently, there has been a surge of studies focusing on the political connections of Chinese foundations. However, we have found no literature focusing on the empirical study of tax-exempt status of contemporary CFs in China.
Using a reliable dataset of 767 CF observations obtained from the China Foundation Center and manually collected tax-exempt status information, this study analyzed the tax-exempt status and associations along with the organization features among CFs. Section 2 of this study describes briefly the relevant regulation and legal environment of tax exemption for charitable organizations in China and the potential policy effects involved. Section 3 provides the theoretical framework and a literature review of tax incentives, agency problems, and the transparency of charitable organizations. Section 4 describes the research methodology, including the research hypothesis, data sources, and estimation models. A logistic regression method was adopted for the empirical analysis. Section 5 presents the estimated results from logistical regression analysis regarding three types of tax-exempt status. Moreover, Section 6 concludes that there are strong and significant positive associations between tax-exempt status, transparency, and donation dependency of CFs.