Generosity unlocked: From taxpayers to changemakers

Tax assignation schemes allow taxpayers to allocate a portion of their income tax to registered nonprofit/non-governmental organizations of their choice. This means that taxpayers can direct a percentage of their taxes to support specific charitable causes.

Several European countries have such schemes in place. These include Hungary, Lithuania, Poland, Romania and Slovakia.

Hungary

Hungary introduced its tax assignation system in 1996. The original purpose was to provide financial support to nonprofit organizations and encourage civic engagement. The tax assignation is known as the “1% Law” or “Personal Income Tax Assignation Scheme.” Taxpayers can allocate 1% of their personal income tax to a registered nonprofit organization of their choice during the annual tax filing period, which typically occurs between February and May of each year. NGOs must meet certain criteria and register with the tax authority to be eligible to receive these funds.

Lithuania

Lithuania implemented its tax assignation system in 2004. Taxpayers have the option to assign 1-2% of their personal income tax to registered nonprofit organizations during the annual tax declaration process, which usually takes place between February and April of each year.

Poland

Poland introduced its tax assignation system in 2003. Under the “1% Charity Tax” law, taxpayers can allocate 1% of their personal income tax to registered nonprofit organizations or public benefit organizations during the annual tax filing period, which generally occurs between February and April of each year. [NOTE: For 2024, taxpayers can allocate 1.5% of their personal income taxt to registered nonprofit organizations].

Romania

Romania implemented its tax assignation system in 2002. Through the “2% Law,” taxpayers can allocate 2% of their income tax to nonprofit organizations, religious institutions, or other eligible entities during the annual tax declaration process, which typically takes place between March and May of each year. In addition to the 2% allocation, taxpayers can redirect an additional 3.5% of their income tax to NGOs. This change was introduced to encourage greater support for charitable causes and social initiatives.

Slovakia

Slovakia introduced its tax assignation system in 2004. Through the “2% Law” or “2% Assignation,” taxpayers can allocate 2% of their personal income tax to nonprofit organizations, churches, or other eligible or other charitable entities and civic initiatives. The assignation takes place during the annual tax filing period, which usually occurs between March and April of each year.


Participation and Criteria

While tax assignation schemes provide an opportunity for NGOs to receive financial support from taxpayers who choose to allocate a portion of their taxes to charitable causes, NGOs are not obligated to actively solicit or participate in these programs. Participation in these schemes is typically voluntary and depends on the decision of individual organizations to engage in fundraising efforts through tax assignation.

NGOs may need to meet certain criteria or registration requirements to be eligible to receive funds through tax assignation schemes. These requirements may vary depending on the specific regulations and procedures established by the government or tax authorities.

It is ultimately up to each NGO to decide whether to promote and encourage taxpayers to allocate funds to their organization through tax assignation. Organizations generally have the flexibility to determine their level of involvement based on their fundraising strategies, goals, and capacity.


Criticisms and Challenges

While valuable in many respects, tax assignation schemes may face criticisms and challenges from various stakeholders, including governments, the general public, donors, and NGOs themselves. Some of the criticisms and concerns include:

  • Government Oversight and Accountability: Some governments may be concerned about the lack of oversight and accountability in how tax-assigned funds are utilized by nonprofit organizations. There may be concerns about transparency, efficiency, and the proper use of public funds.
  • Impact on State Budgets: Governments may also be wary of the potential impact of tax assignation schemes on state budgets, as allocating a portion of personal income tax to nonprofits reduces government revenue available for public services and infrastructure.
  • Limited Effectiveness: Critics argue that tax assignation schemes may not always effectively address social needs or prioritize the most pressing issues within society. There may be questions about the efficiency and effectiveness of allocating funds through this mechanism.
  • Public Awareness and Participation: Low levels of public awareness and participation in tax assignation schemes can limit their impact and effectiveness. Many taxpayers may not be aware of the option to allocate a portion of their taxes to nonprofits, leading to underutilization of the scheme.
  • Donor Preferences and Motivations: Some donors, including private foundations and philanthropic organizations, may find the registration and reporting requirements as a deterrent to giving directly to organizations. They may have concerns about the sustainability and reliability of organizations that are reliant/dependent on funding obtained through tax assignation schemes.
  • NGO Capacity and Dependency: NGOs themselves may express concerns about becoming overly dependent on funds obtained through tax assignation schemes. They may worry about the long-term sustainability of their organizations and the potential limitations on their autonomy and flexibility in programmatic decision-making.
  • Administrative Burden: NGOs and CSOs may also face additional administrative burdens associated with participating in tax assignation schemes, including registration requirements, reporting obligations, and compliance with regulatory frameworks.

Political pressures can also pose a significant risk to the operation and effectiveness of tax assignation schemes, as well as the ability of NGOs to access funding and support. Some ways these threats can manifest include:

  • Allocation Preferences: Political authorities may have preferences regarding which types of organizations should receive funding through tax assignation schemes. They might advocate for directing funds to certain NGOs or causes aligned with their political agendas.
  • Regulatory Changes: Political pressures can lead to changes in the eligibility criteria or regulations governing tax assignation schemes. This could involve tightening or loosening the requirements for NGOs to participate, altering the percentage of tax that can be assigned, or modifying the types of organizations eligible to receive funds.
  • Funding Reductions: Governments facing budgetary constraints or political shifts may seek to reduce the overall funding available through tax assignation schemes. This could involve cutting the percentage of tax that taxpayers can assign to NGOs or implementing caps on the total amount of funds distributed through the scheme.
  • Scrutiny and Oversight: Political pressures may also result in increased scrutiny and oversight of organizations participating in tax assignation schemes. Governments may impose additional reporting requirements, audits, or transparency measures to ensure that funds are being used appropriately and in accordance with legal and regulatory standards.
  • Stigmatization or Exclusion: Certain political ideologies or movements may seek to stigmatize or exclude specific types of organizations from participating in tax assignation schemes. This could target NGOs working on controversial issues or advocating for marginalized communities, leading to challenges in fundraising and public support.

Addressing these criticisms and challenges requires ongoing dialogue, collaboration, and improvements in governance, transparency, inclusivity, and accountability across policymakers, regulators, philanthropic and civil society stakeholders.


Leveraging Tax Assignation Schemes

Tax assignation schemes can provide an opportunity for social impact organizations to potentially generate revenue or support from a broad base of taxpayers. By making a public appeal and raising awareness about their cause, organizations encourage taxpayers to recognize and value the good work undetaken by so many organizations across a wide range of needs and interests.

Here are some ways NGOs can leverage participation in tax assignation schemes to sustain and expand their support base:

  • Building Awareness: Participating in tax assignation schemes raises awareness about the NGO’s mission, programs, and impact among the general public. Even if individuals do not allocate funds to the NGO immediately, they become familiar with its work and may consider supporting it in other ways in the future.
  • Cultivating Relationships: Engaging with taxpayers through tax assignation appeals provides NGOs with an opportunity to cultivate relationships with potential donors. By sharing compelling stories, demonstrating transparency, and fostering trust, NGOs can build meaningful connections that may lead to future support.
  • Stewardship and Engagement: NGOs can use participation in tax assignation schemes as a platform for ongoing stewardship and donor engagement. By expressing gratitude, providing updates on their work, and demonstrating the impact of donor contributions, NGOs can keep supporters informed and engaged throughout the year.
  • Diversifying Revenue Streams: While tax assignation schemes can be a valuable source of funding, NGOs should also focus on diversifying their revenue streams to ensure financial sustainability. This may include seeking grants, soliciting individual donations, organizing fundraising events, and exploring earned income opportunities.
  • Advocacy and Education: NGOs can use participation in tax assignation schemes as an opportunity to advocate for policy changes and educate the public about the importance of supporting nonprofit organizations. By highlighting the value of their work and the impact of charitable giving, NGOs can help shape public perceptions and policies related to philanthropy and social impact.

While the return on investment of such appeals may vary and can be uncertain, engaging in these schemes can serve as a catalyst for ongoing fundraising and donor cultivation efforts throughout the year. When integrated into an overall strategy for outreach and relationship building, organizations may achieve solid and steady results over time.


Summary

Participation in tax assignation schemes can serve as a starting point for NGOs to engage with the public, raise awareness about their cause, and cultivate a supportive community of donors and advocates. While the immediate financial impact may vary, the long-term benefits of building relationships and diversifying support can be invaluable for sustaining and expanding the organization’s impact over time.

It’s important to note that the specific requirements and procedures for tax assignation may vary within each country, and NGOs must comply with local regulations to participate in these schemes. Additionally, tax laws and regulations are subject to change, so it’s advisable for NGOs to consult with legal and tax professionals for the most up-to-date information and guidance tailored to their specific circumstances.


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