Saturday, August 15, 2009

Some Reflections on Hein Persche

As Clive Cutbill of Withers Worldwide wrote on 27 January 2009 regarding Hein Persche v. Finanzamt Lüdenscheid, the decision of the European Court of Justice is “a very significant decision which should have ramifications for charities, donors and tax authorities across the EU.” While Mr. Cutbill identified some of the ramifications for charities, donors, and tax authorities, my purpose here and in future posts, is to reflect on the meaning of this decision in the context of charity generally, and the monitoring of charity transparency and accountability. If we are interested in the success of the charity sector, and in transparency and accountability in that sector, then we need to consider more than the tax consequences of our decisions to donate to charitable causes.

The European Court of Justice built its rationale in Hein Persche v. Finanzamt Lüdenscheid on its earlier decision in Centro Musicologia Walter Stauffer v. Munchen für Körperschaften. Together, these decisions stand for the proposition that Member States must extend non-discriminatory tax treatment of charities that are resident in other EU Member States. In Walter Stauffer, the Court held that a Member State could not tax the income of the Member States’ charities if that income would have been exempt had that nonresident charity been resident in the Member State charging the tax. As I wrote in my last post, the Court held in Persche that based on its interpretation of Article 56, EC, which dealt with the free movement of capital, a tax deduction for gifts made to charitable bodies must not be restricted to those charitable organizations established and resident in the Member State in which the taxpayer donor resides and claims the deduction for the gift made to the charity in another Member State.

What the European Court of Justice did was to simply treat the donation as a normal commercial type transaction, the movement of finances and goods across State borders, without regard to whether such transactions and tax treatment are consistent with the whole nature and purpose of charitable giving and activities. While I cannot argue with the importance of the free movement of capital in normal commercial transactions, and the rationale of the Court here in Persche, I still wonder if the Court did not overly simplify this principle to the extent that it could be applied to situations in which it clearly would not be appropriate and which would not be consistent with the intent of the framers and signatories to the EC Treaty.

For example, I cannot believe that one could argue with any degree of plausibility that money laundering in support of some terrorist or criminal activity in another jurisdiction should be permitted as consistent with the free movement of capital without regard to the legal consequences of such transactions. Indeed, this was the concern of the EC Directorate-General, Justice, Freedom and Security in its initiative regarding “The Prevention of and Fight against Terrorist Financing through enhanced national level coordination and greater transparency of the non-profit sector” and its meeting of NPO umbrella organizations, representatives from Member States, and stakeholders on 12 February 2009 in Brussels. Moreover, as Clive Cutbill pointed out in his paper of 27 January 2009 concerning the Persche decision, Member States will now have to establish mechanisms to prove to fiscal authorities that the activities of charities from other Member States must satisfy the requirements for charitable tax treatment in the taxpayer’s Member State.

However, I am not prepared to agree with Clive Cutbill that for donors this Persche decision is “unmitigated good news.” While I would agree with him that donors may be able to give tax free donations efficiently to any charity in the EU, subject to the proviso that they can prove that the charity satisfies the domestic meaning of charity, I am not sure this will necessarily open up a much broader range of potential donors as he suggests.

The reason for my caution relates to the whole nature and import of donor trust, and indeed, of public trust. I will address this subject in subsequent posts, but suffice it to say at this point, the tax consequences of the gifts are not the sole motivating factor for much of the giving to charity that I believe exists today, and for the foreseeable future.

I do not have the statistical data for Europe, or indeed from other regions of the world, but if the data is anything like the data for the United States, the largest percentage of giving is from individuals, rather than from foundations and institutional philanthropy. Further, statistical data for the United States demonstrate that most charitable and not-for-profit public benefit organizations are small with annual revenues under US $2 million, rather than large, well-known, international charities.

THE CHRONICLE OF PHILANTHROPY, in a recently published series of articles, spoke of coping mechanisms for dealing with the current economic situation. Almost all of these articles spoke of the importance of developing trust between the donor and the charity, and by implication, between the public benefit sector and the larger general public. To do this, the sector must be transparent in its communications with the public and with potential donors, and be accountable to that public.

The members of ICFO are committed to promoting standards and monitoring compliance with those standards by charities. Many philanthropic institutions may have the resources to perform the required due diligence to satisfy need for transparency and accountability between the specific charity and the philanthropic institution and establish the required trust between the donor institution and the charity. However, except in the case of giving by individuals on the basis emotional motivations, many donors give on the basis of their on-going relationships, either with leadership of the charitable organization, or with the organization itself. Nevertheless, except for these exceptions, individual donors cannot be expected to perform the required due diligence to establish the level of trust between the charity and donor arising out transparency and accountability that is required for responsible stewardship and giving. This is where ICFO and its member organizations come into the equation in a way government tax authorities cannot.

Hein Persche had a home in Portugal in the area in which the charity in question was located, a retirement home and attached children’s home. There is every indication in the history of this case that Hein Persche had some kind of on-going relationship with the charity, and knew of its need for the particular gifts-in-kind he donated to this charity. However, it appears that challenging the tax laws in Germany might have been part of his motivation for giving beyond simply his desire to help this charity.

1 comment:

  1. At the risk of turning this into a pure dialogue, might I clarify the context of my comments to which Rollin refers and justify myself a little?

    I agree entirely that charitable giving should not be driven by tax considerations; however, whilst no one should give to save tax, they will normally wish to (and arugably should) give in a tax-efficient manner. That way the most money is available for the purpose the donor wishes to support at the least cost.

    Much of my practice relates to advising in relation to the making (or soliciting) of charitable donations across borders. Many people living in one country will have connections with (and wish to support charities based in) others. In an increasingly globalised world, this is inevitable.

    Because many jurisdictions (for example the UK and the US and, historically at least, a large number of European states) have adopted a 'territorial' approach, requiring a gift to be to one of 'their' charities if it is to be tax efficient, those who wish to support charities elsewhere (for example the UK alumnus of a UK university, who works and earns in the US but wishes to support his alma mater) are required to give through a 'friends of' structure; where US citizens earn in another jurisdiction, the position may be even more complex, necessitating the use of a 'dual qualified' structure.

    My reference to the Hein Persche case being 'unmitigated good news' for donors has to be read in this context; for those donors who are taxable in one European country and wish to support (or to continue to support, for example following a move of employment) charities in another, anything which makes their lives less complicated (and their charitable giving less costly)is good news.