Until now, corporate social responsibility (CSR) has become one of the accepted business norms of our time. It is considered as business practices that involve initiatives that benefit society. The European Commission defined CSR not long ago as “the responsibility of companies for their impacts on society”, a succinct and clear summary, to be sure. Common CSR activities in Ghana include providing a school, mechanized well or hospital to a community, contributing to a scholarship scheme or adopting a hospital, sponsoring programs or activities of individuals, communities or other corporate institutions. Therefore, the CSR of a multinational or medium to large-scale company will encompass a wide variety of strategies, from spending a large part of a company’s income on charitable activities, to implementing “greener” business operations, etc.
CSR comes with its own benefits; helps win new business, increase customer retention, develop and improve relationships with customers, suppliers and networks, improve reputation and business standing, provide access to investment and financing opportunities, generate positive publicity and media opportunities. A 2015 study by the Kenexa High Performance Institute in London (a division of Kenexa, a global provider of business solutions for human resources), for example, found that organizations that had a genuine commitment to CSR substantially outperformed those that did. they didn’t, with an average return on assets 19 times higher. In addition, CSR-oriented companies had a higher level of employee engagement and provided a noticeably better level of customer service. However, some companies do not always accept their responsibilities in this area with a good heart, and a good number admit to having embraced CSR mainly as a marketing gimmick.
For those considering CSR as a strategic option, the question to ask may be this: is CSR worth considering in tax planning, especially for companies that allocate significant funds to their CSR activities? Taking Ghana as a case.
With the huge funds that corporate entities incur in CSR activities, it is always prudent to take this into account in corporate tax planning because the type of CSR activity, particularly donations, sponsorships or contributing to a cause that worth, could determine how much tax a company must pay. pay at the end of your evaluation year. According to section 124(1) of Ghana’s Income Tax Act 2015 (Act 896) “…a person shall file with the Commissioner General no later than four months after the end of each year of assessment a statement of income for the year. This declaration will generally indicate how much income was obtained in the year, the expenses incurred during the period for which a profit was obtained and on which a certain tax liability has resulted.
Evaluating the profits earned by companies for tax purposes will require an adjustment or restatement of the company’s reported profits, as there could be some expenses (including in donations or sponsorships) that may not be allowed (i.e., not allowed) that are made. it will be deducted from the income according to Law 896. When this happens, the profit before taxes (PBT) declared by the financial statements of the company will be taken as a base and any donation, sponsorship or contribution to a valuable cause considered as expense not allowed. the PBT to arrive at the new gain. Article 100(1) of Law 896 stipulates that “where the income corresponding to an assessment year in respect of a person who has made a donation or contributed to a worthwhile cause is to be determined under article 2, the person may claim a deduction that is equal to the contribution and donation made by that person during the year for a noble cause approved by the Government under subsection 2”. Section 100(2) establishes the criteria for determining what type of donation, sponsorship or contribution to a worthwhile cause is allowed to be deducted as an expense from income. It establishes that “the following are justifying causes approved by the Government:
(a) a charity that meets the requirements of section 97
(b) a scholarship scheme for an academic, technical, professional or other course of study
(c) development of any rural area or urban area
(d) sports development or sports promotion; and
(e) any other justified cause approved by the General Commissioner”.
Therefore, a corporate entity that engages in any CSR activity, particularly in regards to sponsoring, donating or contributing to a worthwhile cause that does not meet the criteria set forth above, is expected to have a higher tax liability.
What this simply means is that, assuming a company reports in its financial statements that it incurred an amount of $150,000 as a donation or sponsorship as part of its total expenses, resulting in a pre-tax profit of $400,000, with a corporate tax rate of 25%, the company is subject to tax of $100,000 other things being equal. However, when determining the tax liability, the tax authorities will subject the donation and sponsorship expenses to section 100(2) of Law 896 and assuming that the expense does not comply with the provision of this section, then the PBT will be readjusted by adding return the $150,000. This will result in a new PBT of $550,000 that will generate an increased tax liability of $137,500 (ie an additional $37,500). Ultimately, after-tax earnings will drop from $300,000 to $262,500, a reduction of about 13%.
I am not far from being wrong if I conclude that any additional income earned as a result of the CSR activity would ultimately have been dragged down by the additional tax liability. It is perhaps for this reason that some corporate entities are careful about the type of CSR they perform or engage in CSR that does not have significant financial implications.
Managers of corporate entities should not just start with any CSR activity, but also consider tax involvement. All strategic financial decision sessions must consider the effect of each CSR. In the worst case, a balance must be struck between the social benefit and the financial cost.