The Percentage Tax Mechanism: Past, Present and Future (DRAFT)

Estonian overview

Kristina Mänd

July 2015

 

This is an overview of the status of the percentage law planning in Estonia.

1. Background
2. The first legislation on NGOs in Estonia
3. Laws regarding charitable donations to NGOs
4. The process regarding the percentage system in Estonia:
   • Background of the situation at the time the percentage system was considered
   • Background of when and why the percentage tax was considered
   • Actors behind the idea
5. The study on percentage system:
   • The aim of the study
   • The process and content of the study
   • The most important aspects of the policy study
6. Conclusions of the study
7. Information on philanthropy development since the study was made
8. Information on public funding development for NGOs since the study was made
9. Personal perspective whether it was a good decision not to have a percentage system

Appendix 1

Sources

 

 

1. Background

At the beginning of 2015, 31 581 NGOs (in Estonia, called civil society organizations or CSOs or non-profit organizations) were registered in Estonia. 97% (30 633) were associations and 3% (947) were foundations. About 1/3 of the associations (~10 000) were apartment associations. In 2014, each month about 120 new NGOs were registered and about 30 of them terminated their activities. According to the Network of Estonian Nonprofit Organizations (NENO), the number of functional and operating NGOs is about 25 000 as about 80% of the registered organizations submit their obligatory annual report (Source: Hea Kodanik (civil society journal Good Citizen, winter 2014). Estonian nonprofit sector has been characterized by a high number of NGOs with a small number of members and limited funding. According to the USAID NGO Sustainability Index, Estonian nonprofit sector is the most sustainable in the region.

2. The first legislation on NGOs in Estonia

Until 1989, NGOs were founded and governed according to a law inherited from the Soviet times which did not distinguish between associations and foundations. In 1989, a new law on social organizations was adopted which lasted until 1994 when it was amended into the Act on Associations and their Unions. Since this was still insufficient, Estonian NGOs and the parliamentary constitution committee with strong support from the International Centre of Non-for-profit Law (ICNL) drafted two new acts: the Foundations Act and the Non-profit Associations Act. Both were enacted in 1996. Very few amendments have been made since. All nonprofit entities are founded under these two laws but some are governed by specific laws, such as Trade Unions Act, Apartment Associations Act, Act of Churches and Congregations and Estonian Political Parties Act, etc.

3. Law(s) regarding charitable donations to NGOs

In Estonia, it is the Income Tax Act, adopted in 2993, that deals with charitable giving. The tax system in Estonia favors not NGOs but donations made to charitable NGOs operating in public interest (or benefit) which are in the government list of non-profit associations, foundations and religious associations. The list includes only these NGOs that are registered in Estonia. Although every NGO in that list must prove its public benefit status, not all public benefit NGOs decide nor have to be on that list. This is up to an NGO to apply.

NGOs do not have to pay any corporate income tax on any income, including donations. In this respect, they are treated in a manner similar to businesses. Moreover, NGOs are permitted to engage in any activity, including business that corresponds to the purposes stated in their statutes and are not taxed on income from such activity. However, if an NGO is engaged in business as its principal activity or uses business income for purposes other than those specified in its statutes, it cannot be entered into the government list and donations made to this NGOs will therefore not be entitled to the tax benefits.

It is the donors, both individuals as well as legal persons, that benefit from income tax incentives (§ 11 of the Income Tax Act). Although every individual and organization (including enterprises) can donate as much as they wish, only donations made to the NGOs on the government list are subject to tax benefits:

• Individuals can deduct the donations from their taxable income of the taxation period but no more than 5% of the income (or maximum of 1920 euros) of the same taxation period for documented gifts and charitable contributions. However, this 5% but no more than 1920 euros includes also tax benefits from trainings costs, home mortgage interests, etc. In other words, donations are not seen as a separate category but treated together with other subjects of tax benefits.
• Legal entities (including enterprises), are exempt from paying income tax on donations provided that the total donation amount does not exceed 10% of the contributor’s profit for the last calendar year or 3% of the individually registered social security tax of the same calendar year, i.e. 3% of the amount, which has been paid as wages or similar payments. (Article 49 (2) of the Income Tax Act).
• When a public benefit NGO on the list makes donations to any other institution, no taxation apply.

The treatment of non-monetary donations is the same as for monetary donations, and taxation is based on their market value. All donations are included automatically in the contributor’s semi-completed income tax return form.

This law, especially the definition of public benefit and charitable status, allows significant room for interpretation by tax authorities. Hence, several NGOs that have been denied public benefit status by the Tax Board have appealed in court and won the right to be included in the government list. For example, the concept of social entrepreneurship is still not well-understood and the law allows inconsistent interpretations.

In short, our legislation does not favor the development of philanthropy and individuals gain very little from the tax incentives on donations. Therefore, the Praxis Centre for Policy Studies proposed a list of recommendations to be discussed, considered and implemented mainly by the public sector in order to develop philanthropy and individual giving and NENO is currently working on setting up a coalition of NGOs advocating for these changes (read more chapter 8). Percentage system is not among the recommendations.

Source: Praxis Center for Policy Studies (2011), analysis and recommendations on charitable giving “Happiness and dignity via charitable giving”

5. The process regarding the percentage system in Estonia

The issue of income for NGOs has always been high in the agenda, especially among the umbrella organizations. At the end of 1990s and beginning on 2000s, it had become clear that the international funders were going to pull out from Estonia and local NGOs were going to have to find innovative sources of income, including public funding, charitable giving, self-earned income, etc.

It also became clear that the attempts from the NGOs were insufficient and the public sector needed to be more involved and responsible for the development of civil society. Estonian NGOs, however, were not only looking for more income, but for a new engaging culture that would nurture civil society, transparency and accountability.

5.1 Background of the situation at the time the percentage tax was considered

Network of Estonian Nonprofit Organizations (NENO), an umbrella body of public benefit organizations in Estonia had started working on developing such a culture by drafting a respective concept via engagement and outreach from 1998. EKAK (Estonian Civil Society Concept) was a process and a document that defined the mutually complementing roles of public authorities and civic initiative, principles of their cooperation and mechanisms and priorities for cooperation in shaping and implementing public policies and building up civil society in Estonia. It deals with cross-sectoral issues such as engagement in policy making, funding, outsourcing public services, awareness and civic education, volunteering, philanthropy, etc. EKAK guarantees that civil society development is seen in a strategic way as opposed to sporadic, disconnected approaches. After a few years of discussions among the NGOs and between the NGOs and political parties, in December 2002, the Estonian parliament, Riigikogu, adopted EKAK as a basis for cooperation with the third sector. According to EKAK and during subsequent implementation enactment mechanisms, it was agreed that no new policy affecting the sustainability and environment of the civil society and the NGOs will be adopted without systematic engagement, a thorough study and/ or policy analysis.

• Background of when and why the percentage tax was considered

Around the same time, several NGOs, politicians and individuals had raised the idea of the percentage system in Estonia. The main arguments were that (1) it would increase the income to the NGOs, and (2) it would boost philanthropy. However, all these suggestions were based on emotions and the idea sounded as attractive as it was populist. Due to EKAK, the leading non-profit activists believed that Estonian civil society was too advanced to simply copy policies and practices from other countries and had agreed that every fundamental decision must be based on strategic thinking, systematic approach, well-analyzed situation and pre-assessment of the consequences of such decisions.

• Actors behind the idea

The idea of the percentage system was going back and forth but no serious attempts were made either by the NGOs or by the politicians. Several leading NGOs and networks (e.g. NENO, Open Estonia Foundation, Estonian NGO Roundtable) had been discussing the system, mainly based on the Hungarian experience. In 2000 and 2002, the idea was positively introduced in the civil society appendix of the biggest daily newspaper in Estonia. In 2004, several NGO activists and the representatives of the Estonian Parliament attended a respective seminar in Hungary. The Tax Policy Department of the Ministry of Finance was kept informed. NENO organized several discussions with other NGOs and public officials and, at the time, it was agreed that Estonian civil society (mainly due to EKAK and other developments) did not have the same objectives as, for example, Hungary did when introducing the percentage system.

In 2007, two parties, a conservative right-centrist party Pro Patria and Res Publica Union and The Social-Democratic Party proposed the percentage system in their election programs but no debates followed. At the same time, NENO prepared a memo of the experience of the percentage system in other countries along with pro- and counterarguments. Although both parties became the members of the government, the percentage system never made it to the coalition agreement.

However, to make the final and evidence-based decision of the value and viability of the percentage system, in 2008, a newly established and state financed civil society fund in Estonia (born out of EKAK), the National Foundation of Civil Society (NFCS), opened a call for proposals to conduct an analysis on the viability of the percentage system in the Estonian context. The Director of the NFCS, Agu Laius, a well-respected and experienced leader of the civil society movement in Estonia, had supported the percentage system idea but also had his doubts – first, many Estonian NGOs leaders were not convinced mainly due to the contradicting opinions from the countries using the system. Second, the need for an analysis on any new systems affecting the environment of the NGOs had been previously agreed within the framework of EKAK.

In short, although the idea of the percentage system in Estonia has been raised by various individuals and organizations, the analysis itself was an initiative coming from the NGO and made possible by the National Foundation of Civil Society. 

6. The study on the percentage system

Hence the NFCS, with the approval from the Ministry of Internal Affairs (its home ministry) launched an evidence-based study including recommendations for the advancement of philanthropy in Estonia. Policy Studies Center Praxis together with Kristina Mänd was selected to prepare the analysis. The study is available in Estonian: https://vana.siseministeerium.ee/public/Protsent_tulumaksust_kodanikuyhendustele.pdf

• The aim of the study

The aim of the study was to have a thorough and evidence based overview that would serve as a basis for any discussions or decisions related to the viability of the percentage system in Estonia.

• The process and content of the study

In order to find the answers, we did the following:

• We studied the experience and processes in the countries using the percentage system (document analysis and personal communication with experts and NGOs);
• We studied the current state of affairs with regard to charitable giving in Estonia (statistics and prognosis; prognosis of the tax designation system in Estonia);
• We conducted a focus group on the development of philanthropy and civil society in Estonia (NGOs, public officials, politicians);
• We did the pre-assessment of the impact of the tax system in Estonia and how well the objectives of other countries with regard to the percentage system has been met;
• We designed two alternative models for Estonia (see below);
• We analyzed and summarized all changes in legislation that the percentage system would bring along.

In addition, we carefully studied the transfer of the system in the context of policy transfer. A policy used in another country must be studied through specific criteria in order to decide on its suitability in the context (i.e. in Estonia): the uniqueness of the policy (to a country or laws), the existence of the institutions enabling the policy implementation, the availability of necessary resources, the objectives of the percentage system and the extent of the changes concurring with the adoption of the new policy.

The study covered was very comprehensive and covered all relevant aspects (see appendix 1).

• The most important aspects of the policy study

Since our goal was not to transfer the policy to the Estonian context per se, but to see if this system would enable us to achieve specific objectives, the study focused on the following questions:

• What are (could) we (be) trying to achieve in Estonia with the percentage system?

Based on EKAK and other relevant plans, we were looking into achieving the following: (1) to create an environment supporting charity and philanthropy, and involve business sector, based on EKAK and (2) to expand the income base for NGOs.

• How successful have other countries been in implementing the percentage system and what objectives (that they had set) has the percentage system enabled to achieve?

The analysis looked into the impact of the percentage system on various objectives stated by the countries using the system and, based on the information, assessed how well these objectives had been achieved and whether the percentage system had justified the expectations. We noticed that the objectives of the percentage system in the countries using the system were not a set of well-designed strategic objectives but rather a list of expectations that various parties had. We categorized them as follows:

1. financial arguments
   1. financial means to the NGOs are increased;
   2. the use of public money is more efficient;
2. democratic arguments
   1. the role of tax payers in state governance is larger due to the possibility to directly influence the use of tax payers’ money
   2. the distribution of funds is more decentralized and de-politicized
3. civil society development arguments
   1. the relationships between NGOs and their target groups and the public are stronger;
   2. charitable thinking and philanthropy is strengthened.

• How developed are civil society and charitable giving in Estonia, especially in comparison with the countries using the percentage system?

The USAID NGO Sustainability Index in 2007 (a year prior to the study) had positioned Estonia’s performance the best almost in all seven categories, including financial sustainability. We also studied the statistics of charitable donations in Estonia (see below).

• Which problems were other countries facing that we would need to avoid?

It was decided that the percentage system cannot have negative impacts:

• The income tax designation cannot hinder the development of charitable giving by individuals and organizations;
• The income tax designation system cannot replace or diminish the funding from the public resources
• What we learned from other countries, highlighted one more concern – how to find the balance between the funds being distributed among a lot of NGOs and being designated only to a few larger organizations. Namely, we noticed that while many smaller NGOs received only very small amounts, several big ones collected a lot. That, however, did not seem just or appropriate, especially because many small ones had spent a lot of time and effort to collect the designations.

• What kind of financial impact would the percentage system have on the income of Estonian NGOs?

Our analysts prepared two scenarios: (1) if Estonia had had a percentage system in 2005-2006, realistic scenario and (2) if Estonia had had a percentage system in 2005-2006, maximum scenario.

• Realistic scenario: this was based on the same number of NGOs who had received charitable donations from individuals and number of individuals who had made donations. In case of the percentage system, the NGOs would have received about 1 million euros in 2005 and 1,2 million euros in 2006.
• Maximum scenario: this was based on the assumption that all individual declaring income, designate 1% of their tax to the NGOs. In reality, this would have meant lowering the income tax rate by 1% or in other words, NGOs would have received 1/24 of the tax and 1/23 of the tax in 2005 and 2006 respectively. In financial terms this would have meant 21,2 millions euros in 2005 and 25,64 million euros in 2006. However, this would not have been viable.

The actual numbers of donations were 3,3 million euros and 4,17 million euros in 2005 and 2006 respectively.

Based on that discussion and modeling in the analysis, we prepared a prognosis on the comparison of the charitable donations (existing system) and 1% system (system under the study):

Year	Donated amount (million euros)	LIKELY: Designated amount with 1% ** (million euros)	Amount lost by the NGOs in case of %-system	Loss in %	UNLIKELY: In case every tax payer would be designating *** (million euros)	Actual donations from individuals (million euros) ****
2007	6,52	2,70	-59,7	59	31,92	7, 43
2008*	8,44	3,65	-74,9	57	40,41	5,66
2009*	9,33	4,06	-82,4	56	42,45	6,13
2010*	10,23	4,51	-89,4	56	44,50	5,27

* The prognosis is based on the normal increase in the number of donors and the on the prognosis of nominal salary

** In case the 1% tax is designated by the same number of people who otherwise would be donating

*** Highly unlikely and not supported by the experience of the countries using the system

**** The economic depression curbed the amounts as compared to the prognosis

In other words, the analysts and specialist agreed that considering that the number of people designating the tax would remain the same as the number of people currently donating, the financial prognosis and potential legal steps, the income base of NGOs will decrease by 50%. Moreover, we also counted in the fact that the existing tax incentives would not have been allowed as the percentage system would have replaced them.

• What tax designation model would be the most suitable for Estonia?

Based on the experience from the countries using the tax designation system, previous studies on philanthropy and charitable giving conducted in Estonia, analysis of the donor behavior and focus groups organized within this study, we designed two possible models should we still proceed with the designation idea. However, both models were not about designating the tax otherwise paid to the state, but designating the tax otherwise received back from the donations already made.

Please note that we agreed that the simple copying of the system from other countries would not be viable since it would bring no additional value to the NGOs in Estonia.

Model 1 – in addition to tax designation, develops individual giving and philanthropy and attempts to find the balance between regions in Estonia and between small and large NGOs	Model 2 – develops individual philanthropy and civil society at large
Instead of getting back the income tax paid on donations, individual tax payers can choose whether they want that to her-/ himself or they will designate it to the same NGO to whom they had made the original donation. This would not be tied to the existing 5% limit that can be deducted from the income tax.   In order to prevent people from the temptation of not donating their personal money, this option would create an opportunity for designating the tax to the development of civil society in the regions and in general. In other words, an individual cannot designate the tax to an NGOs but to regions and respective foundations will distribute the funds.   Every tax payer in Estonia can designate about 1% of the average income in Estonia.	Instead of getting back the income tax paid on donations, individual tax payers can choose whether they want that to her-/ himself or they will designate it to the same NGO to whom they had made the original donation. This would not be tied to the existing 5% limit that can be deducted from the income tax.   At the same time, the state will designate the same amount to a foundation for the development of civil society.   Model 2 is clearly focusing on the development and promotion of philanthropy and it had become clear that Estonia would be choosing other ways to achieve the objectives of philanthropy development and strengthening the income base for NGOs.
Potential income: to regions/ to NGOs*/total 2007   18,48/         1,34/         19,82 2008   23,40/         1,79/         25,19 2009   24,62/         1,98/         26,60 2010   25,83/         2,17/         28,00 * NGOs who are currently receiving donations	Potential income: to NGOs*/civil society development/ total 2007   1,34/         1,34/                                     2,64 2008   1,79/         1,79/                                    3,58 2009   1,98/         1,98/                                     3,96 2010   2,17/         2,17/                                     4,34 * NGOs who are currently receiving donations
Positive effects and objectives: Financial arguments –        YES Financial means to the NGOs are increased Democratic arguments –        YES The role of tax payers in state governance is larger due to the possibility to directly influence the use of tax payers’ money –        YES The distribution of funds is more decentralized and de-politicized Civil society development arguments –        YES The relationships between the non-profit with their target groups and the public are stronger –        YES Charitable thinking and philanthropy is strengthened	Positive effects and objectives: Financial arguments –        SOMEWHAT Financial means to the NGOs are increased Democratic arguments –        YES The role of tax payers in state governance is larger due to the possibility to directly influence the use of tax payers’ money –        SOMEWHAT The distribution of funds is more decentralized and de-politicized Civil society development arguments –        YES The relationships between the non-profit with their target groups and the public are stronger –        YES Charitable thinking and philanthropy is strengthened
Potential problems: It would be difficult to achieve the agreement from the public sector since it brings along a significant cut in the state income from taxes.   Outreach to the public will be insufficient or biased and not all regions will be reached and the balance between small and large NGOs will not be reached.   Would bring along several legal changes.	Potential problems: Outreach to the public will be insufficient or biased and not all regions will be reached and the balance between small and large NGOs will not be reached.   Would bring along several legal changes.

• Are there other ways to achieve the objectives Estonia has with regard to increasing the income to the NGOs and the development of philanthropy and charitable giving?

We concluded that there were and they were related to the development of philanthropy, working with the public sector on transparency and efficiency of public funding and the promotion of other sources of income, such as social entrepreneurship, etc. (see below).

7. Conclusions of the study and their justification/explanations used

Based on the analysis of the percentage system and its results/ consequences in the countries where it had been adopted, we decided not to use that system in Estonia. From the policy transfer point of view, it would have been viable because the system was not very unique and we had the necessary institutions. However, the study showed serious doubts about the availability of resources (fear of losing the existing benefits, lack of corporate income tax and plans to lower individual income tax 1% a year), achievement of all the objectives and the extent of changes. The main reasons were as follows:

• We could not find any convincing or conclusive evidence to support the design, implementation and promotion of the percentage system in Estonia. It would have taken too much time and money and effort and we would rather need them for the promotion of real philanthropy, charitable giving, tax incentives and the transparency of public funding.
• Based on the studies and the information available from the countries using the system and on modeling a potential situation is Estonia, we concluded that the most significant impact has been on strengthening the NGOs forcing them to be more engaging and transparent. At the same time, the same objective can be achieved by using other methods.
• We found very little evidence of the percentage system having impact on other objectives or had had impact that did not seem to benefit the NGOs (as described above).
• We could not find any logical argument why such a system (designating taxes) should be limited only to the NGOs. Instead, we found that in several countries, also public institutions, such as hospitals and schools, had been included in the list. We did not think this was correct nor served the purpose of strengthening the NGOs.
• Tax designation is not philanthropy because the amount designated does not belong to the donors but to the state. In other words, it is the redistribution of public funds.
• Tax designation is not tax benefit or tax credit. This is an indirect support from the state to the NGOs.
• We could not find any proof that percentage system would advance charitable giving.
• Our modeling showed that in order to increase significantly the income to the NGOs via the percentage system, serious outreach and campaigning would have needed to take place. We did not see the reason for doing that but rather putting our effort in promoting and campaigning for charitable giving and philanthropy under the existing approach.

We concluded that the Estonian civil society, donors and NGOs were too advanced for this system (also based on the USAID NGO Sustainability Index) and that system would be taking us backwards and forcing us to focus on developing a new system instead of promoting and improving the existing one.

We decided that:

• instead of creating a new system whose value was questionable we promote, train and advance NGOs to find these fund developments methods that would suit the achievement of their particular objectives and the implementation of their missions the best;
• NENO as a leading umbrella organization together with other relevant NGOs should direct its resources and energy in promoting charitable giving and working with the public sector to examine tax incentives used in Estonia, improve them in order to meet the needs of the Estonian civil society (e.g. increasing the percentage of tax deductions, removing barriers on taxing donations, making donating easier, improving the legal framework of volunteerism and updating the conditions of public benefit status), make the funding of NGOs from public resources more transparent, just and effective; and empower new ways of getting income, including social entrepreneurship, volunteering and self-earned income.
• we should examine more thoroughly a system used in the United Kingdom whereby an individual could direct his/ her income tax received from the state on a donation immediately to public benefit organizations.

A few years later, we also did an analysis on charitable giving in Estonia and made several recommendations about the legislation, removing %-barriers, improving statistics, promoting charitable giving and preparing a code of conduct on charitable giving (see chapter 8).

As mentioned before, we were afraid that the system might leave the donors with an impression that they have donated which, in fact, they had not. Also, during the analysis, our focus group interviews with the Ministry of Finance Tax Department concluded that the percentage system might decrease or even lose the existing benefits on charitable giving. There was no talk about crowding out direct state support or private giving to the NGO sector.

To summarize, it was decided by the NGOs not to proceed with the percentage system and instead, focus on the advancement of philanthropy in Estonia. No political party has contested that decision nor tried to seriously launch the idea. However, now and then, occasional newcomers to the sector or to the politics (for example, the Estonian Green Party was the last) suggest the idea. They are referred to the study and its conclusions and asked to provide arguments for their suggestions or to prove the validity of the implementation of the percentage system in Estonia. Since they have not been able to do that, there is no consistent push nor driving force to the percentage system. That has led NENO and other civil society specialists to believe that recommending it is not based on evidence or analysis but rather on an illusion or a wish to win popularity.

8. Information on philanthropy development since the study was made

After the study on the percentage system, it was clear that more analysis focusing on charitable giving needed to be done. After discussions and inclusion of the need for such work in the working plan of EKAK, in 2011, the Ministry of Internal Affairs launched a call for proposal. Praxis Center for Policy Studies won and did an analysis on charitable giving “Happiness and dignity via charitable giving” (2011). With the analysis of practices and trends of philanthropy, we were targeting one of the main challenges of civil society – how to secure strategic, regular and transparent giving.

The purpose of the analysis was to describe the experiences and patterns of charitable giving in Estonia and abroad, draw conclusions and present recommendations and suggestions for the advancement of philanthropy in Estonia. We described the factors affecting the environment of charitable giving as follows:

• positive image and recognition of charitable giving;
• smart and considerate donors;
• ethical and effective organizations;
• favorable tax environment;
• prevention of fraud and misuse of giving and ethics of philanthropy;
• statistics and research on charitable giving.

In order to understand the situation in Estonia, we analyzed statistics of charitable giving between the years of 2005–2009, highlighted the trends, examined the work and practices of five Estonian NGOs which collect donations and analyzed Estonian legal environment affecting charitable giving. Based on what we learned from Estonia and from other countries, we prepared recommendations and suggestions for the advancement of charitable giving.

Official statistics told us that charitable giving in Estonia was progressing – in 2009, 5,4% of tax payers declared donations (in comparison to 3,7% in 2005). According to the World Giving Index 2010, Estonia was in the 121st place with 12% of people saying they had given money in the month preceding the study. Economic downturn had had no serious effect on individual giving, but it had negatively influenced corporate giving. All the numbers are included in the table below.

Here are the key findings and recommendations:

• Charitable giving needs to be recognized and valued in the society. For example, we recommended forming a working group of organizations, donors and government officials to launch a program for the promotion, communication and advancement of charitable giving. Although there were (and are) NGOs whose work touches upon philanthropy, it is not the main mission of any organization in Estonia. In addition, we suggested that donors and NGOs discuss and compose a code of good practice for charitable giving. It was done.
• Charitable giving needs supportive legal environment that does not set obstacles. We recommended:

– to clarify the definition of charities (i.e. which organizations should enjoy tax incentives on the donations they receive);

– to calculate the actual cost of various tax incentives to the Estonian state;

– to raise the limits of tax incentives on donations both for individuals and legal entities, including introducing the concept of payroll giving and a modification of the Gift Aid system used in Great Britain in Estonia.

• Charitable giving needs smart and motivated donors. We recommended the launch of a program (mentioned above) to promote charitable giving, help corporations to find good causes, facilitate their philanthropic deeds, and raise the value of donating among individuals. Also, we suggested promoting leaving legacies to public benefit NGOs.
• Charitable giving needs skilful and empowered organizations. We recommended NGOs to better communicate the value of charitable giving to their target groups and donors, use social media in collecting and reporting donations and be transparent and accountable about the actual cost and benefit of donations. We also suggested that good governance and the prevention of fraud to be treated seriously. Moreover, we recommended investing in the improvement of a joint web portal to promote and facilitate donations that is especially useful to smaller NGOs.
• Charitable giving requires the prevention of deception and fraud. We recommended the principles of good practice (mentioned above) and a cross-departmental group consisting of NGOs, donors and civil servants to continue their joint meetings and recommending them to collect reliable information about the cases of deception and to analyze the risks on charitable giving.
• Charitable giving requires proper statistics and research. We recommended amendments to the current system and suggesting that four distinct categories be identified: (1) volunteering time, (2) giving money regularly, (3) giving money as a single act or response to a call for help, and (4) giving things or services.

This study provided us with a lot of valuable numeric as well as policy-making information for next steps. However, although the Ministry of Internal Affairs who has ordered the analysis and despite our constant efforts did very little to actually use or implement any of these recommendations, the NGOs themselves as well as the National Foundation of Civil Society continued working.

In addition, since 2008, the following developments have occurred:

• NENO initiated and led a working group to design the code of conduct on charitable giving. The code is prepared and many NGOs are using it.
• Several banks and big businesses have designed their own donation opportunities in a special environment (check one out here: https://www.swedbank.ee/about/support/donate/start).
• In 2011-2012, Praxis, with the support from the NFCS, prepared and conducted six trainings on charitable giving. 78 non-profits and 17 regional NGO counselors attended.
• In 2011, NENO, together with Praxis prepared and published a handbook on how to collect donations and keep your supporters. The handbook was based on the trainings on charitable giving.
• In 2013, civil society activists and IT-specialists who had created Hooandja or Impeller, a web-based crowd-funding platform where creative ideas can find support (http://www.hooandja.ee/), included a subcategory for civic initiatives in its portfolio in 2013. By the end of the year, it had collected more than 25,000 euros for seven projects in this category. NGOs share video messages from project leaders and information on how to support certain projects through social media, allowing users to feel ownership over projects (USAID 2013). Since 2015, donations have a separate site.
• In 2014, NFCS has launched a call for projects for NGOs to prepare organizational fund-raising plans, especially focusing on collecting donations. Currently that option is also open and once a year, “an organizational development jump” projects are collected.
• Some NGOs are promoting social entrepreneurship and services delivery, including social innovation bonds.
• We have projects promoting summing up small change in shops that will be donated to NGOs.
• In 2015, NENO is working on assembling and coordinating a network of organizations willing to promote charitable giving (based on the recommendations of the Praxis analysis of 2011) and enhancing their own legitimacy, transparency and accountability.

9. Information on public funding development for NGOs since the study was made

Public funding is done via ministries, local government, individual members of the parliament and publicly funded foundations (e.g. the Environmental Investment Centre, Cultural Endowment, Council of Gambling Tax, and Integration and Migration Foundation and the National Foundation for Civil Society (NFCS).

There have been four major developments:

• Creation of the National Foundation of Civil Society (NFCS; in Estonian KÜSK)

In the framework of the EKAK (Estonian Civil Society Development Concept) and due to the fact that the international foundations and support (including Soros money) were leaving, we advocated and worked for the establishment of a civil society foundation in Estonia. Since 2007, it has been in existence. The NFCS was one of the proposals made in a political manifesto of NGOs prior to the parliamentary elections in 2007 that made its way to the Government’s Program. The concept was created by NENO through a participatory process whereby several seminars and meetings with umbrella organizations and experts were held and supplemented by Internet consultations.

The budget of the NFCS was about 1,3 and since 2013, it has been 2,4 million euros a year. Not only has it been a significant source of income, it has made the dissemination of and control over the public funding transparent and strategic. It offers (1) support to the operational costs of the NGOs; (2) support for projects that create a more favorable environment for NGOs; and (3) funding to local projects that promote civic participation and cooperation between NGOs.

The NFCS has proven to be an efficient and trustworthy foundation by the non-profits as well as by the public sector. Since 2011, it has been managing the Swiss NGO Fund Framework Agreement between the Swiss Federal Council and the Government of Estonia: Swiss-Estonian Cooperation Programme. Since 2013, the NFCS took over the coordination of the Local Initiative Program. Since 2015, the NFCS is the coordinator of the regional NGO support centers (previously founded and managed by NENO with the support from the Soros-funded Baltic-American Partnership Program, and later funded and managed by Enterprise Estonia).

http://www.kysk.ee/nfcs

• Transferring the coordination of public funds into a nonprofit private foundation

Estonian NGOs worked hard to get a fair share of the EEA Financial Mechanism money to the development of the nonprofit sector and under the leadership of NENO, designed a model of distributing these funds which foresaw these funds to be coordinated outside the public sector.

The overall objective of the NGO Fund is the strengthened civil society development and enhanced contribution to social justice, democracy and sustainable development. The NGO Fund is a specific Program area within the EEA Financial Mechanism 2009-2014, funded by Iceland, Liechtenstein and Norway, earmarked to provide flexible and accessible funding to eligible NGOs, with the aim to foster an enabling environment for the sector, strengthen its capacity and enhance its contribution to social justice, democracy and sustainable development. NGO Fund in Estonia is established with the Memorandum of Understanding between the Donor states and the Republic of Estonia. The Fund Operator for the program is the Open Estonia Foundation (OEF).

http://oef.org.ee/en/our-work/ngo-fund/

3) Guidelines (manual) for funding the NGOs from public sources

Although the process of making the funding of NGOs from public resources more transparent, efficient, measurable and reasonable following the objectives and principles of EKAK was approved in 2009, its implementation did not start until 2011, because the ministries did not find consensus on practical implementation issues. A working group comprised of representatives from ministries, public foundations, umbrella organizations and local governments developed new guidelines to harmonize the principles of public funding for CSOs, including both project support and institutional funding. The draft concept was published in fall 2012 for comment. In 2012, the draft guidelines were piloted at the local level before they were presented to the government for approval.

The guidelines were composed by the Praxis Center for Policy Studies in cooperation with the Minister of Regional Affairs (under the Ministry of Internal Affairs), who ordered and paid for the guidelines, and several other institutions. The guidelines are based on previous practices by the ministries, local governments and foundations, and on various documents, for example, the Good Public Engagement Code of Practice, the Good Practice of Funding, etc. The Guidelines are not obligatory but recommended to be used by any public funding institutions; they outline the principles of transparent, efficient, measurable and reasonable funding and the specific types of funding, i.e. core support, project support, the delivery of services. The Guidelines were accompanied by 23 information and training seminars for central and local government public officials and NGOs (altogether 443 people attended) all over Estonia. Most ministries and many local governments are using the guidelines.

NGOs hope to expand the availability of institutional or operational grants that support organizational development and sustainability, as opposed to project-based funding.

Links in Estonian: http://www.praxis.ee/fileadmin/tarmo/Projektid/Valitsemine_ja_kodanike%C3%BChiskond/UEhenduste_rahastamine.pdf) and a guide on funding (in Estonian): http://www.praxis.ee/fileadmin/tarmo/Projektid/Valitsemine_ja_kodanike%C3%BChiskond/K%C3%9C_rahastamine/UEhenduste_rahastamise_juhendmaterjal_parandatud.pdf).

4) Development of the culture of engagement of NGOs into public policy and decision making

The discussions around engagement began with the EKAK. By 2005, the Estonian NGOs and the State Chancellery had prepared the first draft of the Good Public Engagement Code of Practice. It was recommended and mainly followed by the NGOs. In 2011, the Estonian Ministry of Finance, responsible for central training of public officials, launched a series of training, conducted by the Praxis Center for Policy Studies. Followed by individual public institutions, a total of 50 trainings for more than 1000 public officials and also nonprofit leaders have been conducted. Good governance and engagement have become a norm. Since 2012, impact assessment and engagement are compulsory in Estonia, deriving from the government regulation (see link below) and is based on the Good Engagement Practices.

Its relevance to funding is two-fold: first, the engagement of NGOs has resulted in several areas of public needs and interests been entered in the public discussion and funding and second, the public officials have recognized the need of reimbursing the costs of being engaged for NGOs and paying for the work, including research, studies, etc. the NGOs are doing in order to participate and consult.

Link: http://www.ngo.ee/node/278

Link: https://riigikantselei.ee/en/supporting-government/engagement-practices

10. Personal perspective whether it was a good decision not to have a percentage system

I think the decision not to use the percentage system in Estonia was right. It was based on a thorough policy study and available information from the countries using the system. I am convinced that percentage system is not philanthropy and should not be considered a form of charitable giving. This is an indirect support from the state to the NGOs based on public participation in the redistribution of the public resources.

We could also find no evidence of percentage system giving a boost to the funding of NGOs. On the contrary, I am convinced that we should work on aggressively and systematically on promoting charitable giving and philanthropy and social entrepreneurship in Estonia, implementing the recommendations made in the studies. Every NGO should design a fund-development system most suitable to its mission, organizational culture and style. The role of NENO and other umbrella organizations and foundations is to support the environment of NGOs to work in, including working with the public sector on the development of funding resources and regulations.

 

Appendix 1

 Content of the percentage designation study

1. SUMMARY
   • Civil society
     • Civil society development
     • Strong NGOs and active citizens
   • Description of the percentage system
     • Concepts of percentage system and it connection to philanthropy

2. Questions to be answered with this study
3. ESTONIAN CIVIL SOCIETY DEVELOPMENT
   • Estonian Civil Society Development Concept (EKAK) and its objectives
   • The sustainability of the Estonian NGOs
   • The funding of NGOs in Estonia
   • The participation in NGOs
   • The credibility and legitimacy of NGOs
   • Attitudes towards philanthropy
   • Public benefit (interest)
   • Estonian tax system
4. INTERNATIONAL EXPERIENCE
   • Comparison of the countries using the percentage system to the Estonian context (potential of the policy transfer)
     • Uniqueness of the percentage system
     • Existence of the institutions enabling the policy implementation
     • Availability of necessary resource
     • Objectives of the percentage system
     • Extent of the changes concurring with the adoption of the new policy
   • History of the percentage system and the reasons for creating it
   • Comparison of the percentage system in six countries using it:
     • Designees
     • Beneficiaries
     • Importance of the percentage system in the income of NGOs

5. OVERVIEW OF CHARITABLE GIVING IN ESTONIA
   • Which NGOs have received donations?
     • Donations and gifts in proportion to regions
     • Activities of NGOs receiving gifts and donations
     • Which NGOs did receive the biggest share of gifts and donations?
   • Patterns and habits of individual donors
     • Amount of donations
     • Proportion of donations and an average donation
     • Level of donations
     • Prognosis of individual donations up to 2010
   • If Estonia had percentage system – scenarios
     • If Estonia has a percentage system in 2005-2006, realistic scenario
     • If Estonia has a percentage system in 2005-2006, maximum scenario
     • If Estonia changed the existing system into the percentage system
   • Economic analysis of the percentage system
6. ANALYSIS OF VARIOUS TAX DESIGNATION MODELS
   • Objectives and criteria
   • Description of different ways of designating
     • Designating to organizations
     • Designating to regions
     • Designating to subjects (issues)
     • Designating to the development of civil society
     • Designating to an NGO who already had received a donation
   • Which objectives would these different ways help to achieve?
     • Increase the financial means to the NGOs
     • Strengthen charitable thinking and philanthropy
     • Strengthen the relationships between the NGOs and target groups and the public
     • Decentralize and de-politicize the distribution of funds
     • Increase the efficiency of the use of public money
     • Extend the role of tax payers in state governance due to the possibility to directly influence the use of tax payers’ money
   • Possible models of tax designation in Estonia
     • Model 1
     • Model 2
   • Description of relevant legal changes

Sources

Appendices

 

Sources:

International Centre for Not-for-profit Law (ICNL)

http://www.ngo.ee/sites/default/files/files/213_Legal%20and%20Institutional%20Mechanisms%20for%20Cooperation.pdf

Ministry of Social Affairs analysis on unfair treatment (2008)

National Foundation of Civil Society (NFCS), www.kysk.ee/nfcs

Network of Estonian Nonprofit Organizations (NENO), www.ngo.ee

NENO journal Hea Kodanik (Good Citizen), winter 2014

Open Estonia Foundation, oef.org.ee/en/our-work/ngo-fund/

Participatory budgeting: www.participatorybudgeting.org/about-participatory-budgeting/what-is-pb/

Praxis Center for Policy Studies and Tallinn University Centre of Studies and Development of Civil Society (2008), analysis on “Funding NGOs from national budget in 2006-2007”,

vana.siseministeerium.ee/public/K_RErahastamise_2006-2007_anal_siraport.pdf

Praxis Center for Policy Studies and Network of Estonian Nonprofit Organizations (2008), analysis on “Percentage designation to NGOs”, vana.siseministeerium.ee/public/Protsent_tulumaksust_kodanikuyhendustele.pdf

Praxis Center for Policy Studies (2011), analysis and recommendations on charitable giving “Happiness and dignity via charitable giving”, www.ngo.ee/sites/default/files/files/uuringud/Annetamise_analyys_Praxis_2011_fin.pdf

Praxis Center for Policy Studies (2014), analysis on “Participation in volunteering in Estonia in 2014”, www.ngo.ee/sites/default/files/files/vabatahtikus_tegevuses_osalemine_2013.pdf

Tallinn University (2015), “Institutionalization of civic initiative in Estonia in 2014”, www.kysk.ee/failid/Upload/files/KUAK%2014%20raport.pdf,

TND Emor and Praxis (2009), analysis on “Participation in volunteering in Estonia in 2008”, www.praxis.ee/fileadmin/tarmo/Projektid/Valitsemine_ja_kodanikeühiskond/Vabatahtlikus_tegevuses_osalemise_uuring/Vabatahtlikus_tegevuses_osalemine_Eestis_I_osa_lopuaruanne_171208.pdf

TNS Emor (2013), “Study on attitudes towards charity of 2013”

Transparency International, Estonian National Integrity System Assessment 2012

 

This work has been made possible with the help from Agu Laius, Alari Rammo, Aveli Ainsalu, Elveli Randma, Jane Matt, Kadi Volla and Lia Kohtla.