Since 1st January, 2004, the Polish tax system has had in place the institution of a 1% (as of 1st July, 2022, the amount of the designation has increased to 1.5%[1]) income tax designation for the benefit of public benefit organisations (PBOs), hereinafter: the designation. It was introduced into the tax law by the Act of 24th April, 2003, Introductory Provisions of the Act on Public Benefit Activities and Volunteerism[2] and it was applied for the first time to tax settlements made in 2004 for the year 2003. In the subsequent years of its functioning, the institution has become increasingly popular[3]. The number of taxpayers who in 2020 declared tax designation in favour of PBOs from the 2019 settlement amounted to 14.8 million and the total amount of funds – 908 million PLN (in 2004, it was 80 thousand taxpayers and 10.4 million PLN, respectively); in 2021, the figures for the 2020 settlement amounted to: 15.3 million taxpayers and 973 million PLN; and in 2022 (the figures for the 2021 settlement): 15.9 million taxpayers and 1,115 million PLN. In 2023, the figures for the 2022 settlement were as follows: 12.7 million taxpayers and 1,530 million PLN[4]. A certain decrease in the number of taxpayers opting for the designation should above all be associated with the effects of the so-called “Polish Deal”[5] and “Polish Deal 2.0” (reduction in the number of taxpayers paying the tax and therefore entitled to designate), which was expected[6] and which finally resulted in an already mentioned increase in the percentage of the designation to 1.5%[7], owing to which[8] – despite the smaller number of designators – the sum of designations did not decrease (but even increased).
The group of taxpayers entitled to make the designation includes both non-entrepreneurs and entrepreneurs, although this possibility only applies to personal income tax (PIT) taxpayers[9]. Meanwhile, both PIT and corporate income tax (CIT) taxpayers are entitled to exercise the right to deduct from their pre-tax income (subject to certain conditions) donations made for the purposes of public benefit activities carried out by non-governmental organisations (NGOs). This is because both Acts on income tax – the PIT Act (in Article 26(1)(9)(a)) and the CIT Act[10] (in Article 18(1)(1)) – provide for such a possibility, albeit differentiating the maximum deduction (6% of income in the PIT and 10% of income in the CIT, but no more than the value of the donation).
Tax deduction of donations for public benefit activities and designation are two most important tax instruments that can encourage[11] financial support for public benefit activities by taxpayers. It is beyond the scope of this article whether such support should be provided at all by means of tax instruments[12], in which it was assumed that such instruments – as is the case in Poland, but also in other tax systems[13] – can be used, but on the condition that they are normatively adequately shaped for the correct financial support of public benefit activities; and it is on this question of “correctness” that further considerations will be concentrated.
As already mentioned, only PIT taxpayers can make decisions on allocations within the designation; corporate income taxpayers are not entitled to exercise such a right. Considering the respective scope of personal income tax[14] and corporate income tax[15], the dividing line between the taxpayers entitled to decide on the designation is between natural persons (possibly enterprises in inheritance) as PIT taxpayers and all other income taxpayers liable to corporate income tax. It does not matter whether the taxpayer is an entrepreneur or a small taxpayer, nor where he/she derives his/her income from (employment, business, or any other source). This emphasis is all the more important as the discussion in the third sector environment concerning the designation[16] often uses differentiation between taxpayers who can decide about allocation and those who are deprived of this possibility by being an entrepreneur. However, already in the current status of the law, some entrepreneurs can exercise such a right[17]. In fact, if we are dealing with a natural person conducting a business activity individually or in the form of a civil law partnership, such an entrepreneur, being a taxpayer of personal income tax, may exercise a right to designation on the same principles as a natural person deriving taxable income from an employment contract, a contract of mandate, or other sources. It should also be emphasised that an entrepreneur who is an individual has the right to exercise the designation both in a situation where taxation is based on general rules and when it is rooted in special rules: the so-called flat tax (fixed rate of 19%) or a lump sum tax on registered revenues. Moreover, the actual right to exercise the designation exists in the case of certain commercial law entities, namely partnerships, where the taxpayers are their partners being natural persons (and, therefore, are entitled to exercise the designation when paying PIT on the partnership’s income). However, in the case of other entrepreneurs who, due to their legal form, are subject to CIT (including in particular limited liability companies and joint stock companies), such a possibility does not exist – similarly to other legal persons (e.g. foundations, associations) or other organisational units (e.g. housing communities, ordinary associations)[18].
The group of taxpayers entitled to make the designation includes only PIT taxpayers, while at the same time, both PIT and CIT taxpayers are entitled to exercise the right to deduct from their pre-tax income (subject to certain conditions) donations made for the purposes of public benefit activities carried out by NGOs. Assuming that financial support for the third sector concerns the personal sphere (which might justify the existence of certain regulations in PIT – as a personal tax – only and their absence in CIT – as a corporate tax – in which such regulations would be inadequate due to its nature[19]) – deductible donations for this purpose should appear only in PIT. Meanwhile, they appear in both income tax acts. Therefore, it can be noted that the legislator itself recognises that supporting public benefit activities does not belong to the only personal sphere. Since both natural persons and other income taxpayers making donations to NGOs can benefit from certain tax deductions, it is illogical that in the case of a different instrument (designation), but with essentially the same purpose (supporting public benefit activities), their situation is differentiated. The fact that supporting public benefit activities is not only a “personal” but also “corporate” issue might be also be confirmed by the already well-established and widely-implemented concept of corporate social responsibility (CSR)[20].
The presented differentiation between PIT and CIT taxpayers with regard to the right to decide on the designation, in view of the universal possibility of making the said deduction for donations (the amount of which, for the sake of consistency, should be unified in both Acts on Income Taxes[21]), which is a starting point for proposing the introduction of the designation also in CIT. Since the legislator allows both categories of taxpayers to deduct the donations in question and by doing so, it accepts the tax consideration of supporting public benefit activities not only by natural persons but also corporate entities, in order to ensure also the systemic coherence of both Acts on Income Taxes, it should also allow the same categories to be entitled to the designation. This leads to de lege ferenda proposals to introduce the possibility of deciding on the designation also by taxpayers subject to CIT[22].
It is worth mentioning that there are already some countries (and in the EU) – e.g. Spain and Slovakia – that provide for the designation for public benefit activities not only from PIT but also from CIT. In the Spanish income tax system, taxpayers of both income taxes can allocate 0.7% of their tax to socially-useful purposes[23] and they can also make deductions for donations in the case of both PIT and CIT taxpayers[24], which, therefore, implements the postulate of systemic coherence of income tax regulations concerning the financial support of public benefit activities. In Slovakia[25], three years after the PIT allocation had been launched there, it was decided (in 2004) that an additional allocation mechanism from CIT should be introduced. In doing so, Slovakia combined the institution of the designation with the promotion of taxpayers’ own involvement, namely by differentiating the amount of the allocation according to the involvement of the taxpayer’s own resources. In the case of natural persons, the amount of the designation is increased from 2% to 3%, provided that the taxpayer can document voluntary work of at least 40 hours, while in the case of CIT taxpayers, it is increased from 1% to 2%, provided that donations exceeding 0.5% of tax are made to the third sector[26]. Such a solution may constitute de lege ferenda an interesting element of the designation reform in the Polish system, which is burdened with the problem defined in the literature as “false” philanthropy[27].
The possibility of using the income tax allocation under the institution of designation has been restricted to PBOs. These are organisations that do not act for the benefit of their own members, but for the common good within the framework of their public benefit activities. Not every NGO can acquire the status of a PBO – certain conditions need to be fulfilled[28]. Organisations with this status are subject to certain specific reporting obligations[29], which justifies the right to receive public funds allocated through the designation as the only third sector entities. In the context of the proposed extension of the scope of entities entitled to decide on the designation to CIT taxpayers, it is pointed out that there may be doubts regarding the transfer of the designated funds to the foundations established by them (the so-called corporate foundations)[30]. To express the matter in a slightly different way, there is the threat of privatisation of CIT resources by using the allocation mechanism to finance the private needs of entrepreneurs establishing their own foundations and directing funds to them (which is nothing negative per se), but not to ensure financing of public benefit activities but their own needs (e.g. marketing) or even to avoid taxation[31]. Hence, it is proposed to exclude these entities from the scope of the recipients of the designation[32]; however, the existence and enforcement of such an exclusion may be problematic as, in the absence of a similar restriction for PIT taxpayers (especially in the case of those running an economic activity), a potential allegation of unequal treatment of entrepreneurs could arise. Therefore, an advisable alternative approach could be to focus on the substantive control of the correct use of designated funds for public benefit purposes.
In the public discussions[33] and literature[34], other problems of the designation functioning have been pointed out than those related to the limited scope of entities entitled to decide about it; these are, in particular, issues related to the definition of the so-called specific objective and the practice of creating the so-called sub-accounts, the occurrence of a peculiar competition for the funds from the designation, the recurring concentration of the funds from the designation in only a few organisations, the problem of the so-called false philanthropy, and, paradoxically, the negative impact of the designation at the level of civic involvement in the activities of the third sector. It is therefore postulated, among other aspects, to eliminate the possibility of defining the so-called specific objective and creating the so-called sub-accounts or certain changes in the control of the use of the designated funds[35]. Generally, it seems advisable to focus on the creation of such normative arrangements that would ensure the correct use of designated funds for public benefit purposes, including, in the first instance, the introduction of a certain maximum period for their use.
Currently, there is no indication of a time period in which the designated funds should be used (however, this solution is applied in case of certain income intended for public benefit activities, which is, therefore, exempt from taxation[36]). An interesting example in this context are the regulations in this respect in the already mentioned Slovak system, where the organisation must spend the funds received from the designation by the end of the next year after the year of their receipt (whereby, for amounts exceeding 3,320 EUR, it is necessary to publish an appropriate report on the use of the funds and, in case of receipt of 33,000 EUR or more, to undergo an audit)[37].
In the future, in Polish regulations there should be a solution limiting in time the possibility of using the designated funds and ordering their return with an appropriate interest to the budget in the event of failure to use them in an adequate manner within a maximum period of time, and an organisation which would act in this way should be excluded (at least for a certain period of time) from the possibility of obtaining the allocated funds. There are already some regulations in the PBAV Act which provide the basis for the exclusion of PBOs from the list of entities entitled to receive allocated funds[38]; however, it is worth considering supplementing them with the premise of the failure to adequately use the designated funds within a certain period of time. In fact, it should be made clear at this point that the designated funds are public funds and not private funds of taxpayers. The allocation mechanism does not deprive them of such a character, while at the same time it has the effect of reducing public resources to finance expenditure set out in public budgets already suffering from deficits, so these funds should be appropriately used as soon as possible. A year (counted from the end of the year following the year in which the funds from the designation are received) seems to be a natural time limit for taxes with an annual tax period.
Following the example of the aforementioned Slovak solution, this should be coupled with making the reports of PBOs more detailed in the part concerning the use of the designated funds and subjecting them to a compulsory audit in the event of their significant amount[39]. In addition, there should be an obligation to report on the use of the designated funds in tax returns and, in the event of misuse, these funds should be paid back to the tax authority with an appropriate interest (rather than being transferred to other funds[40]).
The designated funds should be used to finance public benefit activities; it refers to a closed, albeit extensive, catalogue of activities[41], the selection of which is in principle related to the concept of the common good[42]. However, in the practical operation of the designation institution, the overwhelming majority of these funds are channeled to meet individual needs, which is done through processes related to the so-called specific objective and the so-called sub-accounts. Under these, a sub-account is allocated by the PBO for an individual who has become a “beneficiary” of the PBO, to which the funds from the designation can be transferred for his/her individually-defined needs within the framework of the so-called specific objective. In such a system, the designation actually becomes a mechanism for the transfer of public funds to specific individuals[43] who “win” in a kind of competition between PBOs and their beneficiaries to obtain them[44]. Those who, for a variety of reasons (including, above all, being aware of the existence of such mechanisms, but also, for example, having a wider circle of taxpayers’ friends with high incomes and the resulting taxes willing to contribute the designation to them) will “do better” under the conditions of this competition, will find themselves in a more favourable financial position than less “resourceful” subjects. In fact, by introducing them to the designation “market”, organisations enable them to gain a privileged financial position at the expense of other subjects with the same needs which do not benefit from the allocation. This “favouritism” consists in the fact that public funds – which should be allocated to the common good – go to satisfy particularistic (which does not mean unjustified) needs. It may be that those who are more in need and less “entrepreneurial” or with a narrower circle of taxpayers’ friends with high incomes able to identify their needs under a specific objective are the ones in the worst situation. The presented mechanism, in which the personal contacts of the people in need themselves and their families play an important role, clearly gives more opportunities to those who move in an affluent environment than to those who do not have such contacts. Such real inequalities, resulting from a certain “resourcefulness” or even “entrepreneurship” (manifested by mailings or leaflets as part of a kind of ‘marketing action’ of a specific objective), may be understandable and acceptable in the case of economic activities aimed at individual profit, but not in the case of public benefit activities and tax public funds, which should serve the common good and finance socially-useful tasks[45]. This is because the mechanisms described result, de facto, in the transformation of public benefit into private benefit[46]. The biggest recipients[47] of the tax designation use the institution of the so-called sub-accounts with the main focus on financing individual medical expenses or helping the disabled (as well as social assistance)[48]; therefore, the literature[49] argues that the charitable – and not civic – nature of the tax designation funding should be recognised, which also shapes this – i.e. charitable[50] – model of PBO activity.
Simultaneously, it becomes questionable whether the activity of the PBO carried out in this way can still be considered public benefit activity at all under the described mechanism. By its very definition[51], it should be a socially-useful activity, i.e. one aimed at the common good[52]. Public benefit, therefore, excludes individualism, understood as securing the needs of specific individuals or specific closed communities. It should also not be overlooked that the so-called sub-accounts relieve organisations of the responsibility for deciding how to spend the amounts they receive in allocations, and that the role of PBOs is basically limited to managing the sub-account system; PBOs become only ‘revenue channels”[53]. Such management and financial activities do not fall within the scope[54] of the public benefit activities in question.
The literature even uses terms such as “the distortion of the idea of public benefit”[55] or “a source of pathology”[56] in this context (representatives of some NGOs themselves also point out that the described mechanisms related to the so-called specific objective and the so-called sub-accounts contradict the idea of public benefit[57]); attention is also drawn to the problem that to a large extent the designation serves as a kind of mechanism for supplementing deficits in the financing of medical procedures for selected persons[58]. Therefore, the tax designation finances tasks for which the public sector should, in principle, be responsible[59]. The presented issues justify the need for changes to the designation institution[60], in particular – de lege ferenda – the need to abolish the so-called specific objective.
Systemic assurance of the most effective use of the designated funds requires transparency and substantive control in this regard. In order to ensure this, there should be a corresponding expansion of PBOs’ tax returns (Annex CIT-D or, alternatively, the development of a new annex, e.g. CIT-OPP), their substantive activity reports[61], and their financial statements, which would make it clear whether, when, and for what exact purpose the funds allocated under the designation have been used. Therefore, the necessary legal changes concern not only tax legislation, but also the PBAV Act and balance sheet law[62], as well as the content of the relevant implementing regulations[63]. Such regulations should ensure greater transparency in the use of the designated funds, reduce certain irregularities in this area, and ensure better use of public funds for socially-useful purposes and for the common good.
The conducted analysis leads to the conclusion that the designation institution in many respects does not provide the correct financial support for public benefit activities. Hence, a de lege ferenda proposal has been formulated to extend the subjective scope of the designation to CIT taxpayers (combined with the equalisation in both income tax laws of the maximum amount of deductions for donations for public benefit purposes). Simultaneously, the funds from the designation are intended to support public benefit activities; in order for this fundamental premise to be effectively realised, certain amendments to the current legislation are required. Therefore, some further de lege ferenda proposals have been formulated, namely: to define a maximum time for the use of the designated funds, to abolish the so-called specific objective, and to increase control over the substantive use of the designated funds. The implementation of the above-mentioned proposals is intended to enable the enforcement of correct support for public benefit activities by all income taxpayers under the institution of income tax designation in favour of PBOs.
Od 1 stycznia 2004 r. w polskim systemie podatkowym funkcjonuje instytucja odpisu części podatku dochodowego na rzecz organizacji pożytku publicznego. Z prawa do alokacji mogą korzystać podatnicy PIT. Natomiast podatnicy CIT nie mają takiego uprawnienia. Ta sytuacja w polskim systemie prawnym stanowi punkt wyjścia do dalszej analizy prawidłowości finansowego wspierania działalności pożytku publicznego przez podatników w ramach instytucji odpisu z podatku dochodowego, w celu – jeśli zajdzie taka potrzeba – sformułowania pewnych postulatów de lege ferenda.
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| Year | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|---|---|---|---|---|
| Number of taxpayers(in thousands) | 80 | 681 | 1 157 | 1 604 | 5 135 | 7 325 | 8 624 | 10 135 | 11 166 | 11 537 |
| Total designations (in PLN million) | 10.4 | 41.6 | 62.3 | 105.4 | 298.3 | 381.5 | 360.9 | 403.9 | 459.4 | 482.2 |
| Year | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|---|---|---|---|---|
| Number of taxpayers (in thousands) | 12 034 | 12 457 | 13 178 | 13 614 | 14 131 | 14 499 | 14 794 | 15 337 | 15 943 | 12 652 |
| Total designations (in PLN million) | 511 | 560 | 619.1 | 662.2 | 763.9 | 876.7 | 908 | 973 | 1 115.1 | 1 530.4 |
