Tax incentives for private support to culture

Transcription

1 DGIV/CULT/MOSAIC(2001)13 Managing an Open and Strategic Approach in Culture Tax incentives for private support to culture By Péter Inkei Regional Observatory on Financing Culture in East-Central Europe (The Budapest Observatory)

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3 Contents Introduction 1: Scope and purpose Introduction 2: Transitory or lasting? Part One: Terms The sponsorship confusion Two main classes (or three?) Profit versus generosity The supporter's dilemma Individual taxation Other issues The public good Part Two: The cultural policy agenda Make it an issue Fiscal support to supporters Self help Targets Strategies Part Three: A European review The European Union East and central Europe References Annex 1: Resolution of the Ministers with responsibility for Cultural Affairs, meeting within the Council of 13 November 1986 on business sponsorship of cultural activities Annex 2: Communication from the Commission on Promoting the Role of Voluntary Organisations and Foundations in Europe (extracts) Annex 3: Tax incentives in 14 countries in East-central Europe 2

4 Introduction 1: Scope and purpose There is general agreement about the topicality of private support to culture in the whole of Europe. Much is said about financing channels running parallel with central governmental allocations, since these started to shrink from the nineteen-seventies in most parts of the world. Culture has been receiving increasing private support in various forms and amounts in every European country in the past years. Government policies were traditionally supportive to private donations and this positive attitude was usually reflected in the tax systems. With regard to the spread of business sponsorship in the 1970s and 1980s, cultural policies reacted in various ways: some governments until quite recently showed reservations about the excessive influence of market and of private capital over cultural values. Although such fears are not entirely unfounded, by now it has been generally accepted that business sponsorship to culture is worthy of political support. Since the countries in the eastern half of Europe have taken the path of market economy, private support has occupied a similar position in their cultural policies as in the west, including the acknowledgement of claims for positive fiscal treatment. The implementation of this principle is different from country to country, both in the west and in the east, and not all of these differences are due to the different historical or legislative traditions. It should be remembered, that private support to culture is a small part (roughly and generally around one tenth) of private support to all kinds of charity and non-profit-making causes. Governments, politicians and legislators therefore tend to address the issue of private support to culture in the wider contexts of philanthropy, charity, public-private partnership etc. Private support to culture will be observed here from the point of view of cultural policies. By inspecting its various forms and aspects, this publication contributes to the creation of a favourable legal (fiscal) environment for private support to culture. Which means this is not a manual for field practitioners. The country profiles at the end are primarily meant to serve as illustrations, rather than user guides. Anyway, printed manuals on fiscal subjects have a short life cycle as tax laws may change from year to year. The publication reflects a belief that a favourable legal and fiscal environment for private support to culture can be achieved only by reaching common and improved understanding of a range of concepts, some of which will be explored in the course of the publication. In one area, above all others, the current confusion is problematic, i.e. with regard to the concept of sponsorship, and some attempt will be made to explore the legal and generally accepted sense of this term. With regard to the creation of a favourable fiscal environment, this is best embodied in tax relief or tax incentives. These are related terms. Tax relief refers to the process whereby the overall tax burden (either corporate or individual) is reduced with regard to certain types of activities (such as support for charitable institutions). Tax incentives refer to specific measures including, but not limited to, tax relief, often aimed at limited categories of individuals, which aim to modify their behaviour through the use of fiscal mechanisms. The notion of "incentive" may suggest too strongly the motivating function which is of interest to public policy makers, and it does reflect a desire to effect behavioural change. There is a feeling in some parts of Europe that these approaches imply that the government is simply "bribing" taxpayers to giving "protection money" to culture. Or courting sponsors. Relief may sound more neutral, although incentive is the more common term in this context. Of course, taxation affects both sides of the debate; the 3

5 donor/investor and the recipients. (In fact, in Eastern and Central Europe more has been written about cultural organisations as tax-payers and the attendant possibilities of relief. Here only the other side will be discussed, i.e. how legislation treats those who give.) Fiscal relief can be attached to all kinds of private support to culture, from cash donations to sponsorship in kind, services or equipment. Of particular importance in tax policy are those devices, which encourage the increased consumption of cultural products and services - for example through the application of preferential VAT rates. Fiscal laws can encourage (or conversely discourage) donations, share transfers, bequeathing of valuables, creation of foundations, offering free services etc. for cultural purposes. Our choice to concentrate on financial support to culture does not indicate a message that the other forms are less significant. By observing how governments - and of course Parliaments - try to promote and reward private support to culture, we are examining indirect public support. In this sense our subject is indeed the fiscal support of governments to private support to culture. The core subject of this publication is thus the various regimes of tax relief/incentive which accompany private financial support to culture. The theme will be treated with special attention to the circumstances of post-communist countries in East and Central Europe. 4

6 Introduction 2: Transitory or lasting? The relative, and often absolute, decrease of central public resources for culture is the main reason behind the growing interest for fundraising and sponsorship. This fact entails the risk of nurturing false illusions. Illusions over the longer term trends in cultural funding are very common, particularly in Eastern and Central Europe. There is thus a general hope that this reduction in central funding is just transitional, linked to the period of "transition", and after a time and the appropriate economic regeneration, these societies will return to normality, to a situation where the government will again be able to fund culture properly, without the uncomfortable aid from businesses and individuals. In fact, there are no indications anywhere that the post-war structure of cultural finances in most countries in Europe, both eastern and western, will return. Even if governments could afford to do so, they rarely intend to take back the dominant role in funding. The reinstatement of governmental funding domination would go against the prevailing concept of public governance. The acts of decentralisation, désétatisation etc. which have taken place all over Europe were not just neo-liberal measures to achieve and maintain the financial solvency of the state: they are goals in themselves to realise the ideals of society as generally conceived in Europe in these years and decades. Therefore, private support to culture should not be looked upon merely as a stop gap response, a mechanism which replaces state intervention and which will pass as the current hardships of economic and social restructuring pass. The increased presence of private support to culture should be treated as a natural phenomenon of our age (in the whole of Europe) and our newly chosen social system (in the eastern half). Diversity of decisions, values and resources - typical elements of private support to culture - all belong to the very nature of the political ethos in our age. The philosophy behind this is that the state has to hand over much of its responsibility to the second and third sectors, (i.e. to the market and civil society), especially in the cultural field. "Partnership" is a buzz-word for our times, and fundraising is a constant search for new partnership. Conversely we must avoid the temptation to idealise private support to the arts (whether donation or sponsorship). The withdrawal of the state from the financing of culture entailed a variety of losses and sacrifices. It would be an equally false illusion as the previous one, if governments were counting on increased private support to allow for further shrinking of public funding to culture. If one avoids such erroneous positions, donation and sponsorship will be regarded as healthy, reflecting and exploiting the current market driven systems and bringing along in their wake a variety of benefits other than purely financial.. One glass of wine is said to be good for the health, two are all right. There is a general rule that as from three per day there are negative effects for the health, similarly the issue of measure is important for private support to culture. Two calculations deserve attention. How does the amount of private support to culture relate to public support at any given time and place? Secondly, how does culture fare in comparison to the entire target range areas for support? 5

7 Part One: Terms The sponsorship confusion The confusion around sponsorship is two fold: linguistic and conceptual. In many countries, particularly in Eastern Europe, sponsorship is widely regarded as a deed of generosity. Not only in private parlance but also in the texts of laws 1. People often speak of sponsorship received from funds, the state budget or from individuals. For fiscal reasons businesses disguise their sponsorship as donations, yet continue to call it and credit it as sponsorship. Thus the word is used differently from the way Americans and British, the modern inventors of the term, use it. There, sponsorship is a commercial transaction, linked to business objectives and this is reflected both in everyday use and in legal and fiscal consequences 2. Since we are not linguistic purists, we may accept erroneous usage as a fact, bearing in mind that the correct English is also "wrong" in relation to the Latin original, where spondere means "solemnly promise, pledge" etc. and has nothing to do with advertising, PR through supporting good causes. However, the use of the term of sponsorship is in most cases inconsistent in East and Central Europe and reveals conceptual confusion. This makes it difficult to expect a clear attitude of the government towards sponsoring, and - so far as cultural sponsorship is concerned - to define its place in cultural policy. Therefore we advocate that regardless of local, official or informal usage, the term sponsorship should be reserved for commercial transactions between businesses and certain social activities or actors. These range from TV-shows to Olympic champions, from research projects to high mountain expeditions, and all are supposed to be beneficial for the image of the business, through public association with the business name or products. Sponsorship thus primarily belongs to the realm of marketing and public relations, and is related to advertisement and publicity. Payment is done against an invoice and usually incurs VAT. As a rule, the obligations of the two sides are set out in a sponsorship agreement or contract. Sponsorship is pertinent to businesses only and sponsorship received from individuals makes no sense (except in the case of sole traders). Therefore the next chapter refers to businesses, typically corporations or companies. Business sponsorship is a marketing tool, of which altruism and good intentions are not essential parts. Sponsorship decisions are often made on the basis of cool calculation. (In numerous cases the choice is actually merely the private caprice of a manager - or "the manager's wife" as the symptom of whimsical sponsorship is widely named. In the worst examples the sponsorship skirts dubious practice, money laundering or corruption, but the dark side of the issue is not our present 1 Either the same words like support, subsidy, donation etc. are adapted to the local language like "szponzorálás", or a native expression like "támogatás" is consequently translated into English as "sponsoring" (both examples are Hungarian). There are notable exceptions, which live side by side with the false conceptions cited above. Also in Hungary, the standard textbook used in higher education for almost a decade, presents sponsorship as a tool of marketing communication, with very little accent on its public benefit, and the word "tax" never appears in the 200 pages, not to mention tax incentives or relief (Fazekas - Nagy, 2000). 2 This is not without exceptions, either. One can find expressions like "the government was the main sponsor of the event" in professional British and US texts also. 6

8 subject.) In spite of the above comments, in the majority of cases sponsors readily identify themselves emotionally with the goals or values of those they sponsor, and they feel civic responsibility and satisfaction in this choice (indeed this is the real distinction between sponsorship and advertising where the same degree of personal and civic engagement is rare). Sponsoring can, in this respect, be compared to the process of selecting a country or region for inward investment: emotional factors are always present but the bigger the amount of investment under consideration, the smaller role personal and emotional factors will play in the decision. The maturity of a sponsorship environment is partly to be gauged by the degree to which the cultural organisations (or other non-profit-making-sectors) emphasise the possible benefits for the sponsor at least as much as the values of the project for which they seek money 3. Two main classes (or three?) By focusing on sponsorship, we gave an introductory description of one of the two basic forms of business support to culture: sponsorship is support with returns. The other form, philanthropy (donations) is support without returns. In some environments a three-tier system is applied instead of this binary division, whereby a subcategory is available between with or without return, the category with some return. This intermediate class is named patronage in the UK 4. Although the term appears in some legal texts in East and Central Europe, we know of no country which consequently distinguishes patronage from the two other classes. The relationship between the three forms of support coming from business corporations is shown in the following table: With returns With some return With no returns Business communication Sponsorship patronage Philanthropy donations Neither of the two divisions in this simple matrix is without problems, which was also one of the main conclusions of the Culture Committee Report of the European Parliament (Arroni, 1997). Namely that the ambiguities about patronage across the European Union have detrimental effects on the funding of culture. The report argues that companies engage in both patronage and sponsorship with a vested interest and they lend their support with a view to gaining some advantage or something in return. Yet in many respects patronage is treated like philanthropy 5, which has implications in taxation, as will be shown in the next chapter. Philanthropic activity of businesses can follow two basic channels. In its simple form, the company directly donates funds for some cultural purpose; or, indirectly, such support may come from a foundation, established by the business company (or the individual owners). Since in the latter case the donation is given by a non-profit-making organisation (a foundation), in a strict sense it should not be classified in the realm of business support for culture. In most cases however, foundations keep the name of the businesses which generated their funds; their 3 This is one of the main messages of Funding the future - A user's manual for fundraising in the arts, also in this series. Andrew McIlroy, Council of Europe, Strasbourg The limitation of patronage in legal language to the above defined instance is at difference with the everyday usage where all kinds of support for culture (or other good causes) are often called patronage. 5 The French name mécénat avec contrapartie for patronage is particularly suggestive of philanthropy. 7

9 philantropic actions add to the recognition of the company and its brand names. Corporate foundations therefore constitute an integral part of business communication and thus, from the policy point of view, such foundations deserve the same attention like other forms of business support to culture and are also eligible for fiscal encouragement. Profit versus generosity The core of the taxation of businesses is the tax on profit. Profit is what remains from all the money made by a company in a year after all expenses are paid. In its raw state it is called positive result, trading profit etc, and when necessary or permitted items have been added and subtracted it becomes pre-tax profit (also called taxable profit or tax-base). This booklet is not made for, and certainly not by, accounting specialists, which may allow for the looseness of our terms. The official English name of what we called tax on profit above is corporation tax, but it has a variety of official and colloquial names all over Europe. Just to name a few: legal entities income tax (Poland, Slovakia), tax on profits of legal persons (Lithuania), company tax (Hungary) etc. The essence of this kind of tax is that it is paid on profit, so we shall alternatively call it tax on profit (or profit tax), too. Something between a quarter and a half of business profit finally arrives in the public treasuries, and this is a major source of income for each government (although usually lagging behind VAT or individual income tax). Tax authorities therefore eagerly ensure that the pre-tax profit of businesses remains as high as possible. Business support to culture can tap corporation tax in two ways. 1. By decreasing pre-tax profit (or tax base) 2. And by decreasing the tax itself The logic is the same as in the case of your individual income tax: you are allowed to deduct some of your expenditure from your tax base, and then you are also entitled to decrease your tax with certain other items. With regard to its effect on pre-tax, the expenditures of a business company, including payments in support to culture, belong to one of the following groups: a) expenditure made by the business which may qualify as real business expenses 6 ; b) expenditure which does not qualify as a business expense, but the pre-profit may be lawfully decreased, so it is treated as a business expense 7 ; c) expenditure the amount of which cannot be deduced from pre-tax profit. Tax inspectors (or rather, government and legislation) in every country attempt to ensure that only a minimum is defined as eligible for groups a) or b). For many governments, donations 6 The word "expense" is related to "spending". For those, who speak German this may be misleading as the German word of Spenden means "donation": sounding similar, but in the context of accounting representing just the opposite of "expenses". 7 For most people the differentiation between a) or b) has no significance: both have the main effect in so much as such expenditure diminishes the tax burden. However, for accountants and tax authorities the distinction between direct business expenses and related expenses has a number of implications. 8

10 to museums or theatres would not be accepted as falling into group a) or b) and clear legislation is required to ensure that they do so. Sponsorship is clearly eligible for the first group a). Paying for advertising is a business expense, just like paying for electricity. Patronage or donations may be classified into group b), if the law of the country allows, otherwise they will be defined as falling within group c). The taxation logic, in a certain way, works against pious common sense. The mindset of most people would suggest that the less self-interested, in other words, the more charitable certain expenditure (such as support to some cultural event) is, the more it can hope for tax benefits. Many people in culture are astonished when they learn that businesses are treated the other way round. In most taxation systems, financial support given to culture is removed from group a) and sent to c) if the return which the company receives (in our case from a cultural organisation) is worth significantly less than the support. This looks like virtue punished and selfishness rewarded. This is because the taxation logic encourages corporations to be generous after their tax burden has been calculated. Patronage is caught up in this dilemma. The EU document cited above (Arroni, 1997) advocates the harmonisation of fiscal policies to the effect that patronage should be deductible from pre-tax profit in each member of the European Union; group b) above is the technical solution for this. With regard to way 2 of tax incentives to business support to culture - that is, when the calculated tax can be decreased with certain kinds of expenditure - this is the typical method of rewarding philanthropy of corporations. This kind of tax relief is normally an alternative to the groups a) or b) of pre-tax deduction above. These statements are often complicated by a number of additional rules, which may set limits, to the amounts which are eligible for favourable tax treatment of all of the above reviewed kinds. Certain tax regulations maximise the amount spent on advertising and marketing. More typically, the amount of donations admitted to group b) is limited. The surplus is usually simply put into group c), or may even be hit by an additionally fiscal burden or disincentive calculated by a sliding scale. Such fiscal disincentives are rare now in Western Europe. The supporter's dilemma The business company, which has set its mind to support some cultural organisation, finds itself facing the dilemma of choosing between the form of support, with due regard to the taxation alternatives as presented above. If sponsorship is chosen, in most countries the full value can be accounted for as business expenditure and will thus decrease the corporate tax - provided the business makes profit in that year. If they opt for donation, in most countries only a limited amount can be deducted from the tax on profit - again, if there is profit. From this, it seems, that in most countries there is hardly a dilemma: companies would be foolish not to choose sponsorship instead of philanthropy. However, there may be difficulties with sponsorship. It is a kind of corporate advertisement which, by definition, comes close to philanthropy; therefore runs the risk of being taken by the tax authorities as philanthropy, and will be relocated into that category. This is a double risk, because such re-grouping, done at the instruction of the tax inspector, usually entails heavy fines, too. This is why in certain legal environments, where the legitimacy of cultural sponsorship is not stable 9

11 enough, and this is the case in many east and central European countries, business companies often solve the dilemma by choosing the safer form of donation, even when their primary objective is to promote their brand name, i.e. doing publicity and not philanthropy. (One more aspect of the dilemma is VAT, which will be treated later.) Often the dilemma of the supporter appears conversely on the side of the supported organisation: receiving donations incurs no tax obligation, while taking in sponsorship money is normally treated as business activity (the cultural organisation has sold its potential for publicity), which may be subject to profit tax. Individual taxation Individual citizens, "natural persons" in the language of law ("physical persons" in French, Polish, Slovakian etc.), must also pay tax on their income. This is called income tax, and the term may be a source of misunderstanding, especially in countries where legislation applies the same word for both individual and corporate taxation (e.g. dochód in Polish). Most people in Eastern Europe spent the first half of their life without taking notice of such a tax, since incomes were taxed invisibly, as part of the calculation of salaries on behalf of the employer, which, at least indirectly, was almost always the state. When western-type income taxation was introduced, donated money to good causes appeared among the list of deductibles from the beginning in every country, although with variations as to the specific conditions. In East and Central Europe individual philantropy is insignificant as compared to corporate support to culture. We are a far way from the United Kingdom in this respect, where the two sources are nearly on a par; not to speak of the United States, where individual giving has long been the main form of private support to culture. Of course, sizeable contributions to culture require citizens with high income. Additionally, these citizens need to feel inclined to share their wealth with cultural aims. Time is on the side in both of these goals of East and Central Europe. Ten years after the beginning of full-scale political and economic transitions, material and social consolidation is beginning to show signs, and there are pockets where western European standards of living are being approached. The discussion of the social background of cultural donation, the issue of how to promote this "desire to give" is an important issue and tax incentives are only one of the means to this end. Probably not even the most important one. Particularly in the case of individual philanthropy, most donors have other impulses in mind than their tax return Other issues Corporation tax and income tax are the main areas of possible tax relief connected to the private support to culture. However, there are some minor fronts such as VAT (or similar kinds of sales tax) and social insurance (health and pension funds) which equally deserve attention 8. Neither of these should normally have anything to do with financial support to 8 In spite of significant changes and reforms, including the establishment of varying level of autonomy and selfgovernance, the state administrations in East and Central Europe have maintained their dominant role in social insurance. Regulations of payment are similar to taxation - in some places, e.g. Hungary, the mechanisms have been fused, too. This justifies considering the issue together with tax legislation. 10

12 charity. But they cause headaches in cases of donation or sponsorship in kind and in the assessment of the benefit returns for sponsorship. The prevailing view among cultural circles holds that VAT is not a problem because businesses can recover VAT if it is attached to an eligible business expense. In other cases, like donation, VAT is reclaimable only if law stipulates so. Otherwise it is lost to the treasury 9. Another real and widespread problem is VAT connected to in kind sponsorship, i.e. services with which companies support culture: free (or low rate) hotel rooms, meals, air tickets, rented cars etc. This represents a smaller part in the west than in the east, where many organisations have reported having collected more sponsorship in kind than in money 10. Such sponsors in kind are not interested to account for their services at full price, even if this would enlarge the perceived moral value of their support. On the contrary, they often make efforts to prove that these were bargains, devalued and leftover capacities etc, since the lower the admitted value, the smaller the corresponding VAT. However, the average price which the same businesses are obliged to pay for similar goods and services from paying customers sets limits to their endeavours to lessen the VAT burden on the assistance in kind provided to culture. Where the cultural organisation itself is also VAT registered, the same difficulties and tactical considerations arise in connection to the items with which sponsorship is compensated, e.g. free tickets. However, problems with VAT are negligible compared to those with social insurance. If only for the rates: cultural goods and services (books, theatre tickets etc) tend to enjoy preferential rates in the neighbourhood of 10%, social insurance levies are usually uniform and over 30%. The enduring crises of the state health and pension schemes lead fiscal systems to extend the obligation of insurance to newer and newer items and cases. Luckily, private support to culture usually has little to do with social insurance, certainly not directly. One such instance is, if an artist would like to receive tax relief for his (or her) donation in kind: e.g. for a free performance at a charity concert of a foundation. In this case he must first agree with the foundation the amount of the virtual fee which he leaves untouched in the boxoffice. Yet, he needs a slip which certifies that the money was taken, without the prescribed advance of income tax and without social insurance, which two items the foundation must pay to the authorities, and another slip will be prepared stating that the same foundation accepted the remains of the amount as donation and pledges to use them for the given good cause: then, and only then can the artist enter this amount into the corresponding cell on the sheet of his yearly income tax return 11 in order that a given proportion of it can be withheld from his tax. This illustration shows the complexities incurred, even if we have decided to ignore the other side of the story (the fiscal implications at the foundation), in order to simplify our case. There are a wide variety of attitudes which the laws can demonstrate in this respect, ranging from understanding to inflexibility. Two remarks might be made: 9 Banks are in a special position, since their basic turnover, e.g. interest on loans, is exempt of VAT, therefore cannot automatically reclaim VAT which accompanies their sponsoring deals. 10 This trend applies to major events as well; e.g. one third of business sponsorship to the 2000 Budapest Spring Festival was in kind. 11 Tax return - the English usage covers the entire procedure leading up to eventual return of money, either way, from or to the treasury. In most other languages the act is called "declaration" or "admission" of the individual's yearly income tax. 11

13 Even those for whom culture matters more than anything in this world must respect the good intentions of tax legislators and must believe that treasury receipts are not wasted. Tax legislation and authorities are treated in abstract form here. Concrete cases are not cited in order to avoid anecdotic presentation of diverging ways in which laws may be implemented. This is not a euphemistic reference to the professional or moral fallibility of tax inspectors, especially in the east. In the west, too, manuals on charity and sponsorship base much of their advice on recent reports about how inspectors tend to deal with ambiguous cases: life continues to produce new ambiguities, challenging even the professionally best equipped tax inspectors day by day. The public good Whether the private support to culture is derived from businesses or individuals, one of the main fiscal features is the relation of such assistance to the public good. What are the criteria by which some acts of support receive tax relief, and what are the criteria by which some others are excluded? From the point of view of public benefit, legislation distinguishes between three main forms of private support: 1. Forms whose public desirability is expressed by some kind of fiscal relief; 2. Forms which - regardless of whether they are desirable or not - are not rewarded fiscally; 3. Forms which are fiscally discouraged Public worth is defined either via the supported objective or via the recipient of the support. In some countries the main emphasis is on the former. There, laws contain taxonomic lists of "good causes", which entail tax relief. Culture is usually among the priority items in such lists, named as such, or specified in more detail including like artistic activities, maintenance of historic monuments etc. The other way of determining public worth is via the latter, the addressee of the support. This may take several forms (one country may apply all three forms, e.g. Bulgaria): By defining certain categories of institutions, whereby a type of institution is by definition eligible for benefits; By maintaining registries, where the relevant authority examines institutions one by one whether they qualify for charity benefits; And by applying taxonomical lists with the names of possible recipient institutions. Here the selection is made "from above", as opposed to the previous form, where any institution can apply. Some countries combine the two approaches, i.e. tax relief is possible if either the objective or the recipient is among the preferred ones. The definition of public worth for the eligibility to tax relief is usually accompanied by "provided if" and "except if" type of clauses, e.g. private individuals are usually excluded from among eligible recipients of support. 12

14 The main concern of tax legislators is almost always to reduce the chances of tax evasion and tax abuse and this determines their choice of one or the other of these approaches. Tax control is easier where the recipient is on a list. Tax legislators therefore have a strong preference for closed lists and this often responds to the desire of public administrations to maintain a degree of guidance over a sector. These positive attitudes to registries may be corroborated by the support of the cultural sector since belonging to an approved set provides considerable comfort and a feeling of security. 13

15 Part Two: The cultural policy agenda Make it an issue Private support to culture, especially business sponsorship is broadly practised all over Europe, including the east. What is specific to the cultural policies in East and Central Europe, is that the importance of private support is rarely acknowledged; and even if it is, usually only the financial aspect is recognised. Unless decision makers and the cultural elite are convinced of the merits of increased private assistance to culture, there will be no significant advances in this area. An important goal therefore is to develop such a consensus around private support by making it a cultural policy issue, to raise awareness of the various benefits and implications. In order that key policy influencers gain sufficient insight into the role of private support to culture, they need to be informed about facts. Central to this is the need to know the actual extent of private financial assistance to culture in a given country, and its potential for growth. Collecting data is not a simple task in this area. In most places the systems are not in place to allow accurate and regular reporting of either cultural statistics. Tax authorities are seldom able and willing to provide up-to-date data on private support to culture. Donations are usually covered, but internal analysis of sectors is hardly ever available, and the share of culture (and within this definition, the various cultural domains) can only be estimated. The statistical information required to make the case for sponsorship is even harder, especially if there is no efficient system of tax relief attached to sponsorship. In this case sponsorship statistics are usually lost in the sea of advertising rules and regulations and their statistical data. In addition to an improved awareness about the quantitative contribution in terms of money, decision makers need to be made aware also of the positive qualitative features of private support in relation to the goals of cultural policy. Especially where the general mood is to emphasise the negative effect of fundraising (in terms of time, dignity etc.), it is essential to highlight that fundraising can act as a source of continuous feedback and interaction which may have constructive effects on both parties. Cultural policy can have a plethora of direct ways to promote the cause of private support to culture. This includes awarding the leading sponsors and donors, persuading the elite to set examples, raising skills of fundraising by publications and training etc. Our subject, however, is the indirect governmental assistance to private helpers of culture. Fiscal support to supporters One special advantage of indirect, fiscal support is its relative stability. Such structural adjustments take a lot of effort and need considerable levels of political consensus before any change in the tax laws is achieved - and they are for this reason likely to stay for many years. In contrast, any line in the national budget can be cut in the light of immediate economic circumstances. Indirect aid usually also has the advantage of being valued by ministers of finance more than direct subsidy 14

16 from the treasury. Primarily for psychological reasons: not claiming tax receipts feels different from giving out state allocation. Also because tax legislation is their domain, finance ministers may associate themselves more easily with initiatives in this area. (The other side of the coin is that exactly for these reasons, ministers of culture tend to feel less favourable towards tax incentive measures than such measures deserve.) A precondition to develop a legislative framework is to arrive at proper definitions. In East and Central Europe this is particularly imperative with regard to sponsorship. Sponsorship will thereby move out of its current semi legal status and become an accepted and respected tax, legal and practical mechanism. Clear definitions do not save the corporate supporter altogether from the dilemma of choosing between sponsorship or donation, but choices will be more consequent and transparent. Reformulation of concepts and their legal usage is a joint task for cultural and fiscal administrators and legislators, involving the representatives of the cultural and business communities. Since in most countries sponsorship for media or sports mobilizes larger amounts than for culture, co-operation with the administrators and lobbyists of those fields is essential. Our country profiles, as well as reports from the field demonstrate that the current ambiguous situation is not necessarily always detrimental to the cause of support to culture. Even if in the strict legal sense sponsorship is non-existent, it flourishes in various ersatz-forms: sponsorship is often booked as donation, which entails considerable fiscal relief. This state of affairs however cannot remain for long. The process of legitimation should therefore be governed by those forces which are beneficiaries of sponsorship, including the cultural community. There is the ever-present danger that excessive regulation in the field will lead to the activity being reduced or indeed stopped altogether. A range of international models needs to be studied to ensure that the legislative framework developed suits both the needs of the public purse and the requirements of the non-profit-making sector. Unfortunately, improved information and awareness plus a more sophisticated usage of terms will not necessarily result in more favourable conditions for culture. Lack of precision sometimes influences tax inspectors to decide in favour of activities, which they could not do once their tools have been adjusted and precise guidelines laid down. (For example, it is not in our interest that tax legislators should learn that British law allows the use of the company s logo in case of sponsorship only: acknowledgement for donation is restricted in the UK to the name of the corporation 12. It would be devastating if this was adopted in other countries before proper fiscal relief is created for business sponsorship.) In order to effectively argue for any legislative modification, there should be sufficient knowledge about the various mechanisms of tax relief. Ministers of culture ought to ensure that they have the necessary expertise at hand, either in house (within the legal department) or they should have access to it from elsewhere in the community. Otherwise he/she will be at a disadvantage during the negotiations with the tax legislators. Valid information about other countries is always a great asset. Experiences of Lithuania and Romania, where separate laws have been made on sponsorship, show that improved legislation is only one step forward. Legal instruments will have their beneficial effect only if this issue of cultural policy is permanently examined. 12 Business partnership 2000, p

17 Self help In some countries well established civil society organisations are active in the field of cultural sponsorship and donation: the best known examples are Arts & Business in the United Kingdom and Admical in France, which are the main pillars of CEREC, the European Committee for Business, Arts and Culture; Arbeitskreis Kultursponsoring (AKS, Arts Sponsorship Working Group) is rapidly expanding its activity and influence in Germany. The primary mission of such organisations is to promote the cause of private support to culture and specific mechanisms to ensure that such support develops, via training and advocacy. As will be seen, a Council Resolution encouraged the governments of the European Union to assist the establishment of such organisations as early as This is pertinent to East and Central Europe of today, and there have been some efforts to this effect; however, there is little co-operation between ministries of culture and the few existing sponsorship agencies. An inquiry, conducted by the Budapest Cultural Observatory in East and Central Europe, testified about the deficits in the level of information. Respondents with active experiences in fundraising gave contradictory and often wrong answers about the prevailing fiscal systems. The sources of information appear to be very disperse. The same was felt where a well-edited web-site provides detailed practical and theoretical advice, including legal aspects (like in Poland). There is therefore an urgent need for advising and training. This allows and encourages working relations to be established with the tax authorities, since a standard interpretation of the tax laws is in the interest of all sides involved. There is, for example, a need for sample sponsorship and donation agreements, regardless if the law contains detailed relevant prescriptions or not. Disseminating information may take the form of promotional campaigns. Besides the aim of raising more money for culture, such campaigns can act as informal inservice training of both sides of such transactions, including communication and PR managers as well as accountants of corporations. Tax advising firms can be successfully involved in such campaigns 13. Cultural ministries can share other tasks with such civil society organisations in the spirit of public-private partnership. They can undertake small-scale surveys at relatively low cost: there have been several examples to this in Eastern Europe, too. This information is quicker to collate and reflects more the lived experience of the cultural community than the statistical tables compiled by high commissions, and sometimes partly compensates for the absence of those tables. Targets Most of the legal devices in our concern are compatible internationally, to the effect that they can be successfully adapted in another country. This publication is meant to provide assistance for any national cultural administration to ascertain how the treatment of private payments to culture in their tax legislation looks in international comparison. 13 The second item on our list of references is an excellent illustration to this. 16

18 However, there are obvious limits, the aim cannot be to create a tax paradise for donors and sponsors of culture. A brief survey of the most common tools will facilitate the establishment of priorities among the targets. Deductible items do not cover all kinds of support to culture. In some places donations, in others sponsorship, is left out. The publication Cultural sponsorship in Europe lists nine countries, where both forms are tax-benefited, of course, at varying degrees and conditions: Austria, Denmark, France, Germany, Luxembourg, the Netherlands, Portugal, Spain and Switzerland (in the UK, the standard-bearer of cultural sponsorship in Europe, sponsorship is not automatically booked as operative expenditure). Deduction rate applies to both corporation and income tax. It is normally 100%, i.e. equal to the amount of the support. But in Hungary it is higher and until January 2001 it was 200% in Lithuania (was this removed due to an excessive wave of donations?). The upper limit to deductibility varies from 2% (Czech Republic, Slovakia) to 40% (Lithuania) of the pre-tax profit. Besides these relatively widespread methods special incentive schemes deserve closer attention. One such scheme is the Gift Aid programme in the United Kingdom. Under this scheme the donor can be either an individual or a business. The donated amount is deducted from the pre-tax profit. But in addition, this scheme works as a special form of matching grant since the state adds to the donated amount the equivalent of the corporation tax rate or the basic income rate (22%), which the recipient then reclaims from the revenue office. Any organisation registered as a charity can receive Gift Aid. The upper limit is the amount of the donor's profit tax or income tax. These tools, listed above, are generally applied to tax relief for charity. Within this, few countries differentiate among sectors. Poland is one such country: culture belongs to the group where the upper limit is 15%, as opposed to less privileged kinds of charity with a 10% ceiling. Differentiation can also be applied within the sector. In countries where the logic of the tax laws allows for diverse rates and levels, increased chances are given to some selected cultural policy priorities. In Russia, for example, donations for artistic purposes enjoy a higher limit than those for conservation of heritage. The efficiency of tax incentives is influenced by a number of factors, many of which are well beyond the sphere of influence of the cultural ministry. For example, the same relief rates behave quite differently if the tax rates are high or low. Or nil! In Estonia business corporations are exempt of profit tax, consequently no incentive can be linked to this: an inverse solution is applied, see the country profile. Romania exemplifies the opposite extreme. The high rate of corporate profit tax, 35%, drives companies to produce as little profit as possible. As a consequence, one of the earliest sponsorship laws in Eastern Europe, which links tax relief to the profit, cannot exert significant effect. What about targets of measure? The size of the private financial support to culture may be judged in relation to various things. We shall certainly not try to compare it to the perceived needs. As we anticipated earlier, the two meaningful points of reference are other target areas of private support on the one hand and public support to culture on the other. 17

19 With respect to the ratio between private and public support to culture with one of our feet we stand on relatively solid ground, insomuch as state spending is rather well documented. Still, the difficulty in assessing private support remains. This lack of data may be a great challenge for researchers and statisticians. Based on indirect statistical evidence one is inclined to suppose that in most countries in Europe including the east - the amount of private financial support to culture equals the amount of "unallocated" public funds. Those budgetary items are free, which are not (or not strictly) allocated and technically can be modified from one year to another. The most typical examples are publics funds open for tender, especially for projects, but many more budgetary lines have some degree of flexibility. In reality only this "free" part of public funding is compatible: it would not be fair to compare public capital funding, the structural maintenance of cultural institutions, most of the administrative expenses etc., to the amounts of private sponsorship and philanthropy. For sake of a full picture the spending of local authorities (towns, provinces etc.) on culture should be involved as well. Let us hope that this working hypothesis is provocative enough to boost the search for more data. Strategies to approach ideals Tax legislation is the competence of financial administration. Their representatives are hopefully among the readers of this booklet. The main target readership is, however, not fiscal legislators in the ministries of finance but their partners in the cultural field. The objective is that there should be such partners, who understand the logic and mechanism of taxation laws, see their real impact and are able to argue for the interests of culture. The final aim being that the taxation system should recognise the value of the various forms of private support to culture, and should provide as generous tax relief as possible. Mention has been made to the importance of a working relationship between government agencies and the interested cultural and business communities; also about the advantages of horizontal, inter-sectorial co-operation (especially with the media and sports). The relationship to the ministries of finance, however, remains to be the key issue. Instead of giving general advice to handle this, alternative strategies are presented here based on examples from Hungary in the mid nineteen-nineties. The co-operation model: the financing of theatres. Like elsewhere, the long term guarantees for the theatre culture of the nation were expected from a special law. Certain political parties picked up the idea and included it in their election goals. In the meantime, however, some people at the cultural ministry and the theatre association started to work on the basics of a new financing system. At one point they met to consult with officials at the ministry of finance. The idea was appreciated and work continued jointly. The theatre people could convince the financial colleagues on many points, and in return, they accepted, among others, that the place of the reformed financing scheme should be the Act on the Budget, instead of some cultural act or decree. So it happened. The system 14 has worked ever since, not without mistakes, but even if probably none of the original persons are around, the two ministries show joint responsibility towards the issue. 14 The subsidy for theatres in the central budget is divided in two parts. About half is spent on the physical maintenance of the buildings and is allocated to each theatre based upon individual needs assesment. The other half is divided among the municipalities which run public theatre in the proportion of their own contributions, which needs the relevant decisions of the local governments to be made several weeks before their total budget is voted on in March every year. 18

20 The stagnant model: the law on film. The film trade is a prestigious and pretentious community. They are even better informed about trends abroad than their colleagues in the theatres. So they felt confident about the reforming of their sector. The leaders of the ministry shared this view and jointly declared on repeated occasions that the text of the film law would soon be passed. However it always got blocked at the ministry of finance. The film trade and the cultural minister were both sure that pressure on the government and the Parliament would finally have an effect and the reservations of the financial ministry would be disregarded. However, this was not the case. The government and the influential party bosses were confused by the diverging views which they got from the two directions. The issue of financing the film trade has remained unsolved in Hungary. The confrontation model: the "one per cent law". It was one of the ideas of the party, from which the cultural minister came that upon a similar example in Italy, the citizens should be enabled to direct l% of their income tax to a selected charity organisation. Although it has a broader scope, the preparations were in the hands of the cultural lobby all along. The ministry of finance resisted all the way. But negotiations continued, in fact a standing joint expert commission spent months on improving and arguing. The point of stalemate arrived, but by that time the issue was processed to such depths that the open points were very easy to grasp for the government and the party chiefs. They made their decisions, sometimes accepting the view of the ministry of finance but their fundamental resistance to the law was broken. The law has been a success. With the three models of co-operation, evasion, confrontation we do not pretend that there are no further ways to handle - and successfully at that - the relations with the ministry of finance. 19