Tax reforms adopted for charitable contributions
Japanese government currently adopted two kinds of more favorable treatment in the tax system for donations to non-profit organizations.
One is a temporary measure related to donations for the Great East Japan Earthquake & Tsunami. Another one is a permanent measure for donations to Public Interest Corporations (PIC) and Specified non-profit Corporations (SNPC).
1. Special tax relief related to charitable contributions for the Great East Japan Earthquake & Tsunami
PIC and SNPC are now able to raise special funds for charitable contributions for the Great East Japan Earthquake & Tsunami as designated donation with time limit ending December 31, 2015. To raise funds as designated donation, both PIC and SNPC need to submit fundraising and relief action plan to their respective
authorities for obtaining certification of this designated donation.
But please note that in case of SNPC, it is only limited to certain SNPCs qualified by the National Tax Authority.
For donations given to above PIC and qualified SNPC in respect of disaster relief,
(1) For individual donors, the limit of income tax deduction is raised to 80% of total income from 40%.
(2) For incorporated donors, all amount of donation is regarded as deductible expenses as before.
On top of it, in case of qualified SNPC, individual donors are able to choose (1) above or tax credit for 50% of donations up to 25% of payable income tax (40% of the donation coming off the national income tax, with 10% coming off the prefectural and municipal tax).
Under the above specified tax relief, any donations to the PIC or qualified SNPC that is directly engaging in relief operation are applicable without any question. However, there is a controversial problem for the fact that any donations to the PIC or qualified SNPC that is “not directly” engaging in relief operation but only raising and distributing the funds as intermediary shall not be applicable.
2 Permanent measure for donations to PIC and qualified SNPC
A donation tax system for PIC and qualified SNPC had been reformed recently.
That is an introduction of new selective donation tax benefit for individual donors. Donors to PIC and qualified SNPC can choose either tax deduction, ie “deduction from income” , or tax credit , ie “deduction from income tax”. So far, only tax deduction was available for charitable donations.
If donors choose tax deduction, they can deduct their taxable income up to 40% of total income. If they choose tax credit, they can save their payable tax up to 40% of income tax and up to 10% of prefectural and municipal tax.
(Significant influence to the donations to PIC)
PIC has been authorized its tax benefit for donation automatically when it is recognized as PIC from the charity commissions in Japan (national or local government). However, in order to enjoy the above newly introduced “deduction from income tax”, it is necessary to apply for the status of qualified PICs under the new tax law.
Details of qualification test called the Japanese version of Public Support Test are as follows;
Either (1) having donation from more than 100 people with more than \3,000 per donor to the organization, or (2) the rate of donation income is more than 1/5 in annual income of the organization.
To apply for the above status of qualified PICs, some paperwork is necessary but surprisingly it is very simple and easy compared with application process in the past.
The deduction from income tax is more favorable to donors in general and gives more incentive to them towards donation to charitable and voluntary organizations. Therefore, this tax reform will undoubtedly encourage the giving culture in Japan.