Although the US is often thought of as a money-driven society, many Americans find time to donate to worthy causes. For instance, Americans give about 1.7% of the country’s GDP to charities (individuals:1.76%) and other causes, and about 60% of Americans have given to a charity in the past year.
This is partly because one can easily create a non-profit organization in the US by simply filing a tax return describing the group’s intended activities – which might span a wide range – and agreeing to certain rules. In contrast, total giving in Japan runs at less than .1% of GDP (individuals: only .03%) and only about 17% of all citizens have given to a charity in the past year.
There are several reasons for this gap. One is the relatively flat income structure of Japan, which has far fewer high-paid people than the US – those who not only have the extra money to give but also are in high tax brackets where tax deductions are more valuable.
Another reason is the lack of a religious custom of “tithing,” or donating a fixed portion of one’s income on a regular basis.
But there is another reason; quite simply, it has historically been very difficult for Japanese private sector groups to create non-profit organizations which avoid paying taxes and to which donations are tax deductible. Most organizations have been either created by bureaucrats or required licenses and other approvals that were very hard to obtain.
A New System for “Public In terest Corporations ”
The quintessential case in point is the “public interest corporation” or koueki houjin (“KH”) in Japan. For years, KHs could only be created by government ministries, so they came to be viewed as quasi-governmental in nature.
Bureaucrats could form a KH easily and quickly; they would establish an organization whose intended activities linked closely to categories listed in the law; then, they would have their own Minister stamp some forms to make them official.
In many cases, officials would “suggest” that groups of corporations make the initial donations to get the organization started and presto – fund-raising occurred overnight. It was essentially assumed that if the bureaucrats in charge said so, the intended activity served “the public interest.”
As a result, there came to be thousands of “public interest corporations,” many of which – you guessed it – were staffed by amakudari officials and received hefty government subsidies.
However, with the budget-cutting pressures of the past few years, things have been changing. In 2006, after six years of deliberations, the government passed a law that not only allowed private people to set up KHs for the first time, but also outlined objective criteria that KHs would have to meet in order to ensure that their activities actually did serve “the public interest”.
The new law came into effect at the end of 2008 and, because there were actual criteria, the legal meaning of “public interest” was defined in detail for the first time. The main purpose of this was to cut all the waste – to set things up so that unless pre-existing KHs re-applied, met the new criteria and converted to the new system, they would automatically lose their KH certification and their beneficial tax advantages.
Now, several years after the new law was implemented, there are still more than 500 public-interest organizations waiting in a huge backlog of conversion applications
to the Cabinet Office alone. Additionally, there are more KHs that are “throwing in the towel” because they likely do not qualify under the new rules or because of the burdens of being a KH. [see fig I]
But another admirable – and explicit – goal of the new criteria-based system was to stimulate more charitable giving: to make Japan more of a donations-based society (kifu shakai, kifu bunka). In part, this is the other side of the coin from the goal of cutting wasteful spending. If private sector initiatives could establish KHs by themselves, and individuals and corporations simply “voted with their feet” by giving donations, government tax subsidies for “worthy efforts” could be reduced and the societal value of those new organizations would be seen in a new light by the fact that they were supported by private donors. Conversely, with actual clear criteria to follow, the private sector could be confident that applications might be accepted.
Thus in 2010 the nonprofit association that I lead, The Board Director Training Institute of Japan (BDTI), applied to the Cabinet Office become a private-sector initiated KH. The process was very long and arduous, but in April 2011, our application was approved.
To me, this was not just a matter of getting tax advantages. Much more importantly, it marked a major advance in the quest to improve corporate governance in Japan, because for the first time, the government had affirmed that training and information dissemination to improve corporate governance are activities that serve “the public interest”. This implicit “policy statement” was very important to me.
BDTI has obtained broad approval to conduct two activities as “public interest” activities: (a) offering training programs and E-learning courses about corporate governance, as long as they are open to the public; and (b) information dissemination, conducted mainly at seminars and on the bilingual discussion forum and data library on our web site, http://bdti.or.jp/english/. But it has also obtained approval to derive revenues from advertising, and for offering customized training programs and consulting to specific companies about governance and board practices. BDTI can offer these services at a profit as long as it spends less than one half of its total expenses on them. As long as it meets this condition and a few others, the entire entity of BDTI need not pay any tax and donations are tax-deductible for each donor.
Doubling the Tax Benefit of Donating
Last year, the Tax Agency did something to increase the tax incentives for Japanese individuals to give to worthy causes, creating a new system that, in the case of qualifying KHs, will essentially double the tax benefits received by donors who are in anything less than the highest tax bracket.
Generally, if you donate ¥100,000 to a KH, you can deduct that amount from your taxable income. Thus, if your marginal tax rate is 20%, your taxes will be reduced by ¥20,000 (because 20% x ¥100,000=¥20,000), so you will be able to help society to the tune of ¥100,000 by giving up only ¥80,000 of net cost to yourself.
The new tax credit benefit is a bit complex to calculate, but for anyone whose taxable income is less than about ¥50 million – which is to say, most Japanese taxpayers – the gist of it is that if you donate to a qualifying KH, you will be able to help society to the tune of ¥100,000 by only giving up about ¥60,000. In effect, the tax credit calculation assumes that your marginal tax bracket is very high even though it is not.
For the first time, in Japan’s exceedingly flat-income society, many ordinary people with mid-level salaries will have a real reason to make charitable donations, even if the amounts are relatively small. When combined with the fact that private sector organizations can apply under a criteria-based system, Japan’s new system sets the base for the growth of new grass-roots organizations that will benefit society and for individual donors to support them.
Japan’s hope of becoming a charitable-giving society could become a reality.
Kinks to Work Out
Having said this, the system still has some kinks to work out. Because the immediate primary goal of the new system is (understandably!) to eliminate the “old system”
KHs that do not deserve that status, the application process is exceedingly rigorous, time-consuming, and costly. It takes anywhere between five months and a year to get approval, and even before that, merely preparing the documents and figuring out the complex rules (and arcane accounting system) takes several months at least. Moreover, one needs to hire specialist advisors to do all of this.
In BDTI’s case, it took about one year to get approval. During that entire application period (and before it), donations were not tax-deductible, which made them harder to collect. As a result, many charitable organizations in Japan are so scared of this burdensome application process and the arcane accounting/operating requirements, that they shy away from applying to be a KH. When such persons read my name card and hear that BDTI has obtained KH status as a “start-up” association, they are amazed and ask, “How did you do that? It is incredibly difficult….” The sad answer is that they are right, it was incredibly difficult.
In contrast, creating a similar tax-exempt non-profit in the US – a 501(c) (3) organization – is as simple as describing the organization by filing a special tax statement (estimated time to complete: eight hours) and receiving an IRS recognition letter a few months later. Once the letter is received, any donations made after the filing date become tax deductible, retroactively.
It is easy to see that for newly-formed social entrepreneur groups like BDTI, which don’t have a lot of time to waste nor money to pay advisors, the Japanese system still needs some improvement. But once most of the old-system KHs have been weeded out, it should be more feasible to simplify the application procedures.
The good news is that, this new system is definitely a step towards creating a “giving society” in which private-sector, grass-roots initiative play a greater role.
Nicholas Benes is Representative Director of The Board Director Training Institute of Japan, a non-profit “public interest” organization certified by the Japanese government. (Contact: email@example.com).