Foundations - a brief look at the financial, accounting and tax issues

Non-profit organizations occupy an important position in society between government and profit-seeking enterprises. They are generally established in order to address specific issues, and are most often organized as foundations (or "foundational juridical persons", in legalese). Non-profits include private schools, hospitals and clinics, research institutes and other foundations of a public interest nature. In the Executive Yuan’s version of a draft law on foundations, foundations are divided into two types: Publicly established foundations and privately established foundations, the former being government entities converted into foundations by making them legally independent entities. Whether they are publicly or privately established, foundations face certain financial and accounting issues.

1.

There is no single governmental authority to consolidate regulations on the financial and accounting affairs of foundations.

. At present, to apply for establishment, non-profit organizations must go to different local or central government authorities depending on their "founding purpose" and the size of their endowments, and they will have different governing authorities and management regulations, with local and central authorities each having their own, inevitably different, rules. Although foundations are founded with many different objectives in mind, this does not imply any differences in their financial accounting. Therefore, there should be a unified set of regulations that cut across the government departments involved, or alternatively, there should be a single authority governing the accounting and financial affairs of foundations. .

2.

The various governing bodies have yet to lay down consistent rules for establishing a sound system for financial and accounting operations.

. Although the different governing authorities periodically inspect foundations’ financial conditions and make sure that they are not violating the conditions of their licenses or relevant regulations, what is lacking are detailed guidelines for foundations to follow in their everyday financial accounting operations. This means that accounting systems are not able to operate according to a single set of principles or rules applicable to all foundations. .

3.

Foundations suffer from insufficient transparency.

. The general public has an interest in knowing if a foundation was created for the purpose of benefiting unspecified beneficiaries or specific people. However, except for certain publicly established foundations whose charters stipulate that they publish financial reports, most do not do so because it has not been made mandatory. With so little transparency, the public has no way of knowing if resources are allocated efficiently, and so it is hard for foundations to attract funding. Foundations are therefore well-advised to publish financial reports regularly in order to win the public’s trust and make it easier raise money. .

4.	Many foundations do not know what tax preferences apply.
	. All too often, accountants seem only to know the rule that a foundation's expenditures towards its founding purpose should exceed 70% of its income. Without a thorough awareness of the other tax preferences available, however, it is difficult for them to help foundations do proper tax planning. Taiwan currently has a number of tax preferences for public interest groups and charities, as well as the people or companies that give to them. The following is a summary of these preferences: .
	Those relating to income tax burden, including income tax, land value increment tax, gift tax and inheritance tax: When a foundation meets the criteria in the government's guidelines for "educational, cultural, public interest or charitable institutions or groups", it is exempt from tax on income, except for income from sales of goods and services, and contributors can claim deductions from their taxable income. Also, if land is given for a social welfare cause or to establish a school, it will be exempt from land value increment tax. And in the case of gifts to educational, cultural, public interest, or charitable activities or groups, they do not need to be included in gift or inheritance amounts for tax purposes. Taxes relating to transactions and operations, including business tax (VAT), entertainment tax, customs tariffs, stamp tax, commodity tax, and excise tax on tobacco and spirits: Depending on how closely transactions and operational activities are connected to public interest activities, a foundation may be able to enjoy a reduction of the above taxes or full exemption. Taxes on ordinarily held property, including land tax, house tax and vehicle license tax: If the owner is a foundation, and the use of the property is in the public interest, then it will enjoy certain tax privileges.