Chari­ties aren’t well-suited to tax evasion

At the end of Febru­ary 2019, the Fede­ral Coun­cil suggested making chari­ta­ble foun­da­ti­ons and clubs subject to the auto­ma­tic exch­ange of infor­ma­tion (AEOI) for tax-rela­ted matters. In other words, the exis­ting exemp­tion that applied to them was to be remo­ved. On 20 Novem­ber 2019 the Fede­ral Coun­cil then announ­ced the exemp­tion would remain in place. Nume­rous parti­ci­pants in the consul­ta­tion, parti­cu­larly the proFonds and Swiss­Foun­da­ti­ons asso­cia­ti­ons, had firmly voiced their objec­tion to the exemp­tion being lifted. 

The Philanthropist: Mr Degen, in your press release dated 20 Novem­ber 2019, you wrote: ‘The danger has passed, for the time being.’ Why ‘for the time being’?

Chris­toph Degen: ‘For the time being’ means that the Fede­ral Coun­cil deci­ded that subjec­ting chari­ta­ble orga­ni­sa­ti­ons and clubs to the AEOI would be a poli­ti­cal no-go, once the consul­ta­tion had been concluded and asses­sed. Influ­en­tial poli­ti­cal parties, asso­cia­ti­ons and all kinds of commu­ni­ties stood shoulder to shoulder in their oppo­si­tion to this. As a result, the decis­ion was made not to conti­nue with lifting the exemp­tion for the time being.

TP: Do you think there is the risk that this exemp­tion might be remo­ved anyway?

CD: The OECD may well conti­nue to put pres­sure on the Fede­ral Coun­cil. The Fede­ral Coun­cil can try to convince the OECD to change its own legal basis, known as the Common Report­ing Stan­dards, by colla­bo­ra­ting with other count­ries in the same situa­tion. If they manage to enshrine an expli­cit exemp­tion for chari­ties and clubs in these stan­dards, the topic would be off the table – for good.

TP: What are these other count­ries you’re talking about?

CD: Germany is a key ally for Switz­er­land, and Germany is also making chari­ta­ble foun­da­ti­ons and clubs exempt from the AEOI. It looks like the OECD has not yet set our neigh­bour in its sights, but they are helping us with our exemp­tion provi­si­ons by inclu­ding an expli­cit exemp­tion from the AEOI in the Common Report­ing Stan­dards. This is because the AEOI hopes to fight tax evasion at inter­na­tio­nal level. As a result, the two states both have to show that neither Swiss nor German chari­ties are struc­tu­rally well-suited to tax evasion. If there is no way to evade taxes, making the chari­ties subject to the AEOI would be utterly point­less: it would simply be art for art’s sake.

TP: Are there any other ways to handle this?

CD: Yes. proFonds has star­ted work to enshrine the exemp­tion from the AEOI in law. In the previous legis­la­ture, the former Natio­nal Coun­cil­lor Hans-Ulrich Bigler submit­ted this request in the form of a motion. The Fede­ral Coun­cil is to be asked to propose that parlia­ment regu­late the exemp­tion on a legis­la­tive level. To date, the AEOI exemp­tion for chari­ties and clubs has exis­ted as an ordi­nance, meaning that it was decreed by the government.

TP: Has the motion been handed down?

CD: The Bigler motion is being proces­sed and has not yet been handed down.

TP: In the worst-case scena­rio, what would happen if chari­ties were subject to the AEOI?

CD: Prima­rily, it would lead to a moun­tain of admi­nis­tra­tion, and have a major impact on costs. The Fede­ral Coun­cil assu­mes that one-off intro­duc­tory costs would amount to between 5,000 and 10,000 Swiss francs, plus annual costs of the same amount.

My own small charity, ‘Laurenz für das Kind’, gives out 30,000 to 40,000 Swiss francs in funding each year, so the AEOI would mean that 5,000 to 10,000 Swiss francs would not go towards fulfil­ling its chari­ta­ble objec­ti­ves. That’s simply unacceptable.

TP: Regard­less of the poli­ti­cal decis­ion, chari­ties have faced criti­cism for dodging the taxman. Wouldn’t chari­ties have a vested inte­rest in transparency?

CD: It’s not true that they’re dodging the taxman. The money that donors donate is irre­vo­ca­bly given over to the charity’s objec­ti­ves. The donor can’t take it back! Howe­ver, for other reasons, it would certainly be desi­ra­ble if chari­ties could provide more infor­ma­tion about the things they do for our society, culture, acade­mia, social issues and the envi­ron­ment. Many chari­ties are invi­si­ble, or barely visi­ble. This is so they no longer receive requests that they’re unable to process without having a profes­sio­nal admi­nis­tra­tive office. Trans­pa­rency and clear commu­ni­ca­tion would mean many of these unsui­ta­ble requests would dry up. Howe­ver, this is all a private matter: it is up to the charity, and the charity alone, to decide whether to be visi­ble, and if so, in what form. That said, they do, of course, have to be trans­pa­rent towards the super­vi­sory autho­ri­ties and the tax office.

TP: In addi­tion to the consul­ta­tion on the AEOI, there was some more posi­tive news for you: the Lugin­bühl parlia­men­tary initia­tive was sent out for consul­ta­tion. You played an active role in iden­ti­fy­ing and deve­lo­ping the matters that this initia­tive focu­ses on, with the aim of making Switz­er­land a better loca­tion for charities.

CD: The parlia­men­tary group for phil­an­thropy and chari­ties, previously led by former member of the Upper Cham­ber Werner Lugin­bühl and former Natio­nal Coun­cil­lor Fulvio Pelli (Presi­dent) and contai­ning members from every party in the Fede­ral Coun­cil, commis­sio­ned a group of experts to consider how to make Switz­er­land an even better loca­tion for charities.

TP: What are their core concerns? Are they hoping that charity law will be comple­tely revised?

CD: Abso­lut­ely not! Charity law is relia­ble and sound. Instead, it’s about making a handful of targe­ted impro­ve­ments, with prac­ti­cal solu­ti­ons to meet real needs and over­come genuine chal­lenges. There are eight areas that need to be adjus­ted. The parlia­men­tary group on phil­an­thropy reviewed the measu­res to ensure they were prag­ma­tic, and they are now the focus of the Lugin­bühl parlia­men­tary initiative.

TP: Couldn’t the autho­ri­ties or the courts handle these points in their work?

CD: The group of experts is utterly convin­ced that legis­la­tors need to get invol­ved. Some of the solu­ti­ons they’ve suggested abso­lut­ely need a legal basis. In other cases, we’ve known about the problem for years but the autho­ri­ties and courts have not fixed it and they haven’t chan­ged what they do in practice.

TP: Can you give us an example?

CD: One point rela­tes to the payment of an appro­priate fee to trus­tees or members of a club’s board. Some canto­nal tax autho­ri­ties think that these bodies need to be volun­t­ary for them to keep their tax-exempt status: expen­ses can be reim­bur­sed, but fees cannot be paid to anyone. Some even request that this volun­t­ary approach is expressly stated in the charity’s statu­tes. Howe­ver, tax law does not require these bodies to operate on a volun­t­ary basis. It is only the charity itself that is not allo­wed to make a profit or work for its own gain.

TP: Are there enough volun­t­ary trus­tees to fill these time-inten­sive positions?

CD: Across Switz­er­land, we need around 70,000 trus­tees and 600,000 asso­cia­tion board members, and it is beco­ming ever harder to find people prepared to sit on these bodies on a volun­t­ary basis. I believe that stra­te­gic manage­ment bodies should be up to their task, both for chari­ties and clubs alike. Ulti­m­ately, not ever­yone can afford to work for free, and in line with this, it should be possi­ble for these people to receive adequate recom­pense – they don’t have to be paid, but the option should be there. Stra­te­gic manage­ment bodies hold a great deal of respon­si­bi­lity: they bear full liabi­lity with their perso­nal assets, and today they can even be taken to court for ordi­nary negligence.

TP: Does that mean that you might be asked to put your hand in your pocket, even if you’re in a volun­t­ary position?

CD: Yes, that’s right. That’s some­thing we want to change: in a volun­t­ary posi­tion, people should be exempt from liabi­lity for ordi­nary negli­gence, but if trus­tees and board members are paid a fee, they should still be liable for ordi­nary negligence.

TP: That sounds like a sensi­ble request…

CD: … in our expe­ri­ence, many tax autho­ri­ties are not inte­res­ted in chan­ging how they do things. This mantra that these bodies need to be volun­t­ary was even cemen­ted in the prac­ti­cal notes issued by the Swiss Tax Admi­nis­tra­tors’ Confe­rence. But it simply cannot be right that tax autho­ri­ties should remove a charity’s tax exemp­tion if it pays a fee to the skil­led members needed for these bodies. This is based on a misun­derstan­ding: the orga­ni­sa­tion itself needs to operate along chari­ta­ble lines, not the indi­vi­dual members of its bodies.

TP: You’re asking for this to be enshri­ned in law?

CD: Exactly! We cannot allow the payment of an appro­priate fee to be a reason to deny or remove a charity’s tax-exempt status. That’s why the commit­tee of experts and the legal commis­sion are firm in their belief that we need legis­la­tors to get involved. 

TP: What’s next on the agenda?

CD: The draft bill is now under­go­ing consul­ta­tion until 13 March 2020. Then, the respon­ses to this consul­ta­tion will be asses­sed and the bill will return to parliament.

TP: In the years to come, will there be any deve­lo­p­ments we should note in terms of the chari­ta­ble sector?

CD: Over the next few deca­des, people are going to be leaving huge amounts of money in their wills. The people inhe­ri­ting these bequests are often of an age when they don’t need (all) the money for them­sel­ves. proFonds is very keen that a substan­tial part of these assets take the form of chari­ta­ble dona­ti­ons or be used for foun­ding charities.

TP: What kind of numbers are we talking about?

CD: At present, we can assume that these assets run to around 100 billion Swiss francs – and the trend is heading upwards.

TP: What measu­res do you foresee?

CD: There should be incen­ti­ves like special tax allo­wan­ces for dona­ti­ons and chari­ties in terms of money recei­ved as a bequest. In other words, the dona­tion allowance’s exis­ting limit, capped at 20 percent of the donor’s income, should be lifted. These special allo­wan­ces can only be brought into effect by chan­ging the law. In short, I believe that there is no doubt that we need legis­la­tion to effec­tively imple­ment the Lugin­bühl parlia­men­tary initia­tive. Anything other than that would be misre­a­ding both the facts and the legal situation.

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Members of the group of experts for the Lugin­bühl parlia­men­tary initia­tive:
Profes­sor Georg von Schnur­bein, CEPS, Univer­sity of Basel, Profes­sor Domi­nik Jakob, Center for Foun­da­tion Law, Univer­sity of Zurich, Profes­sor Hans Licht­stei­ner, VMI, Univer­sity of Frei­burg, Dr Chris­toph Degen. proFonds, the umbrella asso­cia­tion for Swiss charities

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Chris­toph Degen has been Mana­ging Direc­tor of proFonds, the umbrella asso­cia­tion for Swiss chari­ties, since 1990. He works as an attor­ney-at-law at DUFOUR Advo­ka­tur, and also lectures at the Center for Phil­an­thropy Studies (CEPS) at the Univer­sity of Basel and the Insti­tute for Rese­arch on Manage­ment of Asso­cia­ti­ons, Foun­da­ti­ons and Co-opera­ti­ves (VMI) at the Univer­sity of Frei­burg. He sits on various boards of trus­tees, and foun­ded the charity ‘Laurenz für das Kind’ along­side his wife. www.profonds.org www.profonds.org