Non-Government Organisations (NGOs) by nature are non-profit making entities and may think that they do not have any tax obligations. Every NGO needs to take initiative to identify all the taxes and legal requirements in their country of operation. Below are some points of reflection on this issue:
Tax exemption status: It is at times assumed that NGOs are automatically exempt from income taxes because they do not make a profit. This may not be the case, and it is therefore important to check with the relevant national revenue authority in the country of operation to assess your organisation’s tax status. For example in Uganda, NGOs have to apply to the Uganda Revenue Authority (URA) for tax exemption. The URA will then conduct a tax audit before such exemption is granted.
Filing of annual income tax returns: Some countries require all companies, including NGOs, to file an annual income tax return. In Uganda, failure to file an annual return may attract an automatic income tax assessment by the URA. The assessment is based on the remaining balance in the income and expenditure statement at the end of the financial year, which normally pertains to finances for project activities carried forward into the new year. Contesting such assessments can be a challenge and may require the services of a tax consultant. NGOs are therefore encouraged to file their annual returns in time to avoid such assessments.
Pay as you earn (PAYE): Many countries operate under the PAYE system whereby the organisation withholds taxes from its employees on a monthly basis. A key point to note is that all the taxable benefits should be included for PAYE computation. These may include; housing, leave time, fuel, and other allowances which vary from country to country. A PAYE return should be filed with the relevant revenue authority and payment should be made within the legally prescribed timeframe. Failure to file returns and to make a payment normally attracts a fine.
Withholding tax: The Uganda Revenue Authority has realised that there is big potential by NGOs to collect and remit taxes. In 2013, many NGOs were appointed as withholding tax agents. This implies that for any services paid above the one million shilling threshold (approximately USD $271), the WHT agent should make a 6% deduction before making such a payment to local suppliers or consultants and make a 15% deduction for international payments.
Value added tax (VAT): This is tax charged and withheld on goods and services produced and sold by an organisation. The organisation may also be charged VAT on its purchases. The net amount should be remitted within the prescribed time to avoid penalties. In Uganda, an organisation that produces and sells goods and services above UGX 150 million (approximately USD $40,730) is required by law to register for VAT.
In summary, as NGOs we need to be up-to-date with our tax obligations to avoid risks associated with noncompliance. Different countries have different tax and legal requirements and we should always endeavour to find out what is applicable in our countries so that we are not caught off guard.