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FINANCE MINISTRY DRAFT TO ADVERSELY AFFECT NON-PROFIT SECTOR INCOME

Uncertainty ahead for Slovak NGOs

LEGISLATIVE changes proposed by the Finance Ministry will take away some of the financial advantages enjoyed by NGOs today. The moves come at a time when the financing of Slovakia's non-profit sector is expected to undergo an overall transformation.
Finance Minister Ivan Mikloš announced on July 31 that his ministry will present to the government a draft amendment to the income tax law.
Under the new legislation taxpayers will no longer be able to deduct donations to NGOs from their tax base - an amount used as the basis for calculating income tax. Moreover, the income non-profit organisations gain from their commercial activities will be taxed the same as profit-oriented enterprises.

LEGISLATIVE changes proposed by the Finance Ministry will take away some of the financial advantages enjoyed by NGOs today. The moves come at a time when the financing of Slovakia's non-profit sector is expected to undergo an overall transformation.

Finance Minister Ivan Mikloš announced on July 31 that his ministry will present to the government a draft amendment to the income tax law.

Under the new legislation taxpayers will no longer be able to deduct donations to NGOs from their tax base - an amount used as the basis for calculating income tax. Moreover, the income non-profit organisations gain from their commercial activities will be taxed the same as profit-oriented enterprises.

"Things which violate the basic idea behind the tax reform are unacceptable for us," said Mikloš, whose reform aims to simplify the tax system.

"Firstly, we can't accept that profit-making activities of NGOs be freed from taxation, because that creates unequal conditions on the market. Secondly, we can't accept the possibility of deductible amounts in cases of donations to NGOs, because we want to eradicate this instrument from our tax system," Mikloš added.

"We definitely do not want to change the rules so that the position of NGOs gets worse than it is today," said Mikloš.

However, many NGO representatives feel that is exactly what the proposed measure will do.

"The planned changes not only fail to open new possibilities, but eliminate the little that has motivated people and firms to contribute to activities independent from the state," said Šarlota Pufflerová from the NGO Citizen and Democracy at a press conference.

Pufflerová is involved in an initiative supported by over 130 NGOs called Citizens to Themselves which opposes the ministry's proposal.

Some organisations are seeing their resources run dry, as many large western donors - in the past the main sponsors of non-profit activities in the country - are shifting their focus to less developed countries and withdrawing from central Europe.

"These countries are now entering the EU and I will no longer put hundreds of millions dollars into this region," said US billionaire of Hungarian origin George Soros, who founded and finances the Open Society Foundation (OSF), in a recent interview with the daily SME.

The US Agency for International Development (USAID), an agency that provides economic and development assistance around the world in support of the foreign policy goals of the US, is also shutting down its office in Bratislava.

The US embassy has cited "Slovakia's quick progress after the 2002 elections" as the main reason for ending financial support.

Before the September 2002 parliamentary vote NGOs ran over 80 projects related to the elections, for which they received over Sk100 million from foreign foundations, according to media reports.

The victory of parties seen as democratic by the West in those elections was crucial for Slovakia's integration into both the EU and NATO. Surveys indicated high attendance would bring better results for these parties and NGOs put much of the money into voter mobilisation campaigns.

The cuts in funding provided from abroad are now leading NGOs to think hard about what lies ahead.

"The non-profit sector today faces the challenge of creating a financially sustainable environment, which will enable it to survive and evolve in the future," said Pufflerová. Activists of the Citizens to Themselves initiative say incentives, such as tax breaks for donors are needed to build that environment.

The non-profit sector is not united in its stance towards the proposed reforms. On July 31 Finance Minister Ivan Mikloš met with NGO representatives, who did not voice opposition to the financial measures.

However, representatives of Citizens to Themselves initiative were not invited for the talks.

"Minister [Mikloš] met with the representatives of a significant portion of NGOs. It is really not in our powers to meet with a representative of every organization. I think it's more a question for the NGOs why they don't communicate, why they are unable to build one team," said ministry spokesperson Peter Papánek.

The meeting was attended by Katarína Vajdová, director of the Foundation for the Support of Civic Activities (NPOA) and Pavol Demeš, NPOA's chairman of the board. NPOA was created in 1993 and acts as an implementation agency for EU pre-accession aid.

Also present was Helena Woleková, director of the SOCIA foundation which supports social services for the needy. Demeš is the chairman of the board of that organisation. He is also head of The German Marshall Fund for Central and Eastern Europe.

In the early 1990s Woleková, Demeš, and Mikloš all acted as ministers in the cabinet headed by Ján Čarnogurský. Mikloš was then Privatisation Minister, Demeš Minister of International Relations, and Woleková ran the Ministry of Social Affairs.

The Democratic Party (DS), for whom Woleková served as an expert on social affairs, appointed her to the position. Mikloš became a DS member in 1993 and in 1994 briefly acted as the party's chairman.

The finance ministry says even after the reform is passed, NGOs do not need to worry about money.

"The ministry has agreed to keep in place the 1 percent assignation, which has been already extended to legal entities, so there is enough room for private financing," said Papánek.

Current legislation enables taxpayers to designate an NGO to receive 1 percent of their tax instead of the state. According to statistics released by the Revenues' Office, in the last year Slovak NGOs gained over Sk100 million through this method. Ministry officials have said they will consider increasing the percentage.

"In addition the state has this year granted the non-profit sector over Sk1.2 billion," said Papánek.

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