Is CSRs Worth Considering in Tax Planning?
Until now, corporate social responsibility (CSR) has come to be one of the accepted business norms of our time. It’s regarded as business practices involving initiatives that benefit society. The European Commission not long ago defined CSR as “the responsibility of enterprises for their impacts on society”, a succinct and distinct summation for sure. Common CSR activities in Ghana include providing a school, mechanized borehole or hospital to a community, contribute to a scholarship scheme, or adopt a hospital, sponsor programmes or activities of individuals, communities or other corporate institutions. A medium to large scale or multinational business’s CSR will therefore encompass a wide variety of strategies, from spending a large portion of a company’s income to charitable activities, to implementing “greener” business operations etc.
CSRs comes with its own benefits; helps to win new business, increase customer retention, develop and enhance relationships with customers, suppliers and networks, improves business reputation and standing, provide access to investment and funding opportunities, generate positive publicity and media opportunities. A 2015 study by the Kenexa High Performance Institute in London (a division of Kenexa, a global provider of business solutions for human resources) for instance found that organisations that had a genuine commitment to CSR substantially outperformed those that did not, with an average return on assets 19 times higher. Also CSR-orientated companies had a higher level of employee engagement and provided a markedly better standard of customer service. Some companies however do not always accept their responsibilities in this area in good heart, with a fair number admitting to having adopted CSR mainly as a marketing gimmick.
For those considering CSR as a strategic option, the question to ask may very well be this: is CSR worth considering in tax planning especially for companies that commit significant funds to its CSR activities? Taking Ghana as a case.
With the huge funds incurred by corporate entities in CSR activities, it is always prudent to factor such in corporate tax planning because the type of CSR activity particularly donations, sponsorships or contribution to a worthwhile cause could determine the amount of tax a company is liable to pay at the end of its year of assessment. According to section 124(1) of the Income Tax Act, 2015 (Act 896) of Ghana “… a person shall file with the Commissioner General not later than four months after the end of each year of assessment a return of income for the year”. This return will usually indicate how much income was made for the year, the expenses incurred for the period for which a profit of so much was made and upon which a certain tax liability has resulted.
Assessing the profit earned by companies for tax purposes will require a re-adjustment or re-stating of the profit declared by the company as there could be some expenses (included in donations or sponsorships) which may not be allowed (i.e. disallow) to be deducted from income per Act 896. When such happens, the profit before tax (PBT) declared per the company’s financial accounts will be taken as a base and any donation, sponsorship or contribution to a worthwhile cause considered as disallowable expense will be added back to the PBT to arrive at the new profit. Section 100(1) of Act 896 stipulates, “where the income for a year of assessment in respect of a person who has made a donation or contributed to a worthwhile cause is to be ascertained under section 2, the person may claim a deduction that is equal to the contribution and donation made by that person during the year for a worthwhile cause approved by Government under subsection 2”. Section 100(2) sets outs the criteria for determining what type of donation, sponsorship or contribution to a worthwhile cause that is allowed to be deducted as expense from income. It states “the following causes are worthwhile causes approved by the Government:
(a) a charitable organization which meets the requirements of section 97
(b) a scheme of scholarship for an academic, technical, professional or other course of study
(c) development of any rural area or urban area
(d) sports development or sports promotion; and
(e) any other worthwhile cause approved by the Commissioner – General”
Therefore, a corporate entity that engages in any CSR activity particularly with regards to sponsorship, donation or contribution to a worthwhile cause that does not meet the criteria set above is projected to have a more tax liability.
What this simply means is that, assuming a company reports in its financials that it incurred an amount of $150,000 as donation or sponsorship as part of its total expenses resulting in a profit before tax of $400,000, with a corporate tax rate of 25%, the company is liable to a tax of $100,000 all other things being equal. However, in determining the tax liability, the tax authorities will subject the donation and sponsorship expenses to section 100(2) of Act 896 and assuming the expense does not meet the provision of this section, then the PBT will be re-adjusted by adding back the $150,000. This will result in a new PBT of $550,000 leading to a more tax liability of $137,500 (i.e. additional $37,500). Ultimately profit after tax will reduce from $300,000 to $262,500, about 13% reduction.
I will not be far from wrong to conclude that any additional revenue earned resulting from the CSR activity would have ultimately be wind-swept by the additional tax liability. Maybe it’s for this reason that some corporate entities are careful of the kind of CSRs they engage in or engage in CSRs that do not have significant financial implications.
Managers of corporate entities should not just embark on just any CSR activities but consider the tax implication as well. All financial strategic decision sessions should consider the effect of every CSR. At worst a balance should be strike between the social benefit and the financial cost.