Tax obligation of non-profit organisations

The term non-governmental organisations(NGO) if it is used in its ordinary terms mean all organisations that are not owned by the government. However, NGOs as we all know are organisations set up to provide services of different nature to the public or targeted group for free or at a highly subsidised rate. By their charter and certificate of registration, they are not profit-seeking.

As such religious organisations, civil societies, pressure groups, community development associations, charitable organisations etc can be classified for the purposes of this discussion as NGOs. Principally, their funding is usually from grants, donations and contributions from members. However, in recent times some NGOs in order to augment their income engage in business-related and profit-seeking activities.

The third schedule (section 19 (1) 74) item 12 to the personal income tax act 1993 as amended “exempts the income of any ecclesiastical, charitable or educational institution of a public character from taxation provided the income is not derived from a trade or business carried on by such institution”. The import of this provision is that the income of NGOs from donations, grants and support services are not taxable. The following are however taxable:

• Income derived from business activities e.g. letting of properties, transportation, production and sales of journals, periodicals, audio & video CDs etc, where these activities are carried out in the name of a separate entity or for profit.
• Where NGO’s funds are used to acquire assets i.e. motor vehicles, landed property etc. in a name different from that of the organisation or in the name of an individual who is associated with the organisation, funds so expended become income in the hand of the entity/individual and as such taxable.

What are the other tax obligations of NGOs?

1.  Pay as You Earn (PAYE): The law exempts NGOs as an entity from paying taxes on non-profit related income as explained above. Employees of NGOs are not exempted from payment of personal income tax. NGOs as employers of labour are required to deduct appropriate taxes from the income of their employees and pay same to the relevant tax authority on or before the 10th of the following month.
2. Withholding tax: Whenever an NGO pays an organisation, individual or an unincorporated entity rent, royalty, management fees, consultancy fees, technical service fees, agency fees, supplies and contracts, appropriate withholding tax must be deducted and remitted to the relevant tax authority.
3. Rates and other user charges: Rates and other user charges must be paid unless the law relating to the imposition and collection of such rates has an exemption provision. For example, the land use charge act of Lagos state expressly exempt places of religious worship, however, other properties owned by the religious organisation are not so exempted.