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. Not long ago, the European Commission defined CSR as “the responsibility of companies for their impacts on society”, a succinct and clear summary, no doubt. 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 enhance relationships with customers, vendors and networks, enhance reputation and business position, 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 did not, with an average return on assets 19 times higher. Additionally, CSR-oriented companies had a higher level of employee engagement and provided a markedly better level of customer service. However, some companies do not always take their responsibilities in this area wholeheartedly, and a good number admit to adopting CSR primarily 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 commit 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 wise to take this into account in corporate tax planning because the type of CSR activity, particularly donations, sponsorships, or contributing to a worthwhile cause penalty, could determine the amount of tax a business must pay. pay at the end of your evaluation year. According to section 124(1) of the Income Tax Act 2015 (Act 896) of Ghana “…a person shall file with the Commissioner General not later than four months after the end of each assessment year an income statement 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 of so much was obtained and on which a certain tax obligation has resulted.
Assessing profits earned by businesses for tax purposes will require a readjustment or restatement of the profits reported by the business, as there could be some expenses (including in donations or sponsorships) that may not be allowed (i.e. disallowed) to be are made. 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 the basis and any donation, sponsorship or contribution to a worthy cause considered as spending not allowed. the PBT to arrive at the new gain. Article 100(1) of Law 896 stipulates that “when the income corresponding to an evaluation year with respect to a person who has made a donation or contributed to a worthy cause must 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 worthy cause is allowed to be deducted as an expense from income. It establishes that “the following are justified 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; Y
(e) any other just cause approved by the Commissioner General.”
Therefore, a corporate entity that engages in any CSR activity, particularly as it relates to sponsorship, donation or contribution to a worthy cause that does not meet the criteria set out above, is expected to have a higher tax liability.
What this simply means is that, assuming a business reports on its financial statements that it incurred $150,000 in 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 $100,000 tax on an equal basis. However, when determining the tax obligation, 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 which will result in an increased tax liability of $137,500 (ie an additional $37,500). Ultimately, after-tax earnings will be reduced from $300,000 to $262,500, a reduction of about 13%.
I will not be far from being wrong if I conclude that any additional income obtained as a result of the CSR activity would have ultimately been dragged down by the additional tax liability. Perhaps it is for this reason that some corporate entities are careful about the type of CSRs they undertake or engage in CSRs that do not have significant financial implications.
Managers of corporate entities should not just start with any CSR activity, but also consider tax participation. 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.
