Tax is an issue that many of us avoid thinking about. Registered NGOs have a legal responsibility to know and comply with the tax laws in their country of operation, and unfortunately ‘ignorance is no defence’ in the eyes of the law!
Warning! Mango is not in a position to give professional tax advice on any given country situation. The following guidance is an overview to help you think about where you may need to get further help. Do get advice from a tax advisor, your auditor, or talk directly to your tax authority.
This section includes guidance and tips on:
Most countries require employers to deduct taxes from employees’ pay through the payroll. This is tax on the employee’s income. It is not an expense of the NGO, but the NGO has the responsibility to deduct it at source and remit the tax to the relevant tax authority. It is sometimes called Pay As You Earn (PAYE).
Make sure that you consider the correct figure to base your tax calculations on. This starts with basic pay, but may also include bonuses, overtime, housing allowance, per diem, lunch allowance, travel allowances and benefits in kind (such as vehicle use, airtime etc)
Calculate your tax correctly. Many countries operate a system of tax bands, so that people paid lower amounts pay a lower percentage of tax, and everyone gets a little bit tax free.
See some worked examples of PAYE calculations.
Using Excel to do payroll
Many NGOs use Excel to calculate their payroll. See a sample payroll spreadsheet that you could modify for your needs.
Deduct your payroll taxes each month and remit them on time to the tax authority, together with the appropriate return form. Always obtain a receipt.
End of the tax year
At the end of the tax year, carry out a tax computation for each employee based on their gross salary for the year, and compare to the actual tax deducted during the year. If the employee has had unpaid leave, or payments made in lumps rather than equal monthly amounts, there may be adjustments to make.
Some countries have compulsory savings schemes to provide for future pensions. These may be called national insurance contributions or social security contributions.
Technically this is not a tax, but a 'forced saving'. None the less, it is considered here because it is usually remitted and deducted at the same time as income tax.
There is frequently an employee’s contribution and an employer’s contribution. In the following example, the employee’s contribution is 5% of basic pay, and the employer's contribution is 10% of basic pay.
When an NGO has cash flow problems, a tempting option is to delay remittance of income tax (PAYE) and / or Social Security contributions. This may result in fines and penalties.
Where possible, try to negotiate a formally agreed extension with your tax authority (accompanied by duly signed letter of confirmation to protect yourself!)
A common fraud in NGOs occurs when taxes and social security contributions are deducted from employees but not remitted to the tax authorities. Instead, they are stolen by the Accountant or Senior Managers who may pay a bribe to local tax officers.
Many NGOs are granted exemption from income tax on their year-end surpluses arising from unspent grants. This is not automatic however, and it is often necessary to obtain a formal exemption certificate or letter.
If you have non grant income, this may or may not be taxable. Local income such as local donations, contributions from local businesses, fundraising activities, sponsorship or government support will not normally be taxable.
But own generated income such as rental income, hiring out assets, profits from trading or consultancy services, may be taxable, depending on the rules in your country.
If you are funded solely by grants and do not sell anything, it is likely that you need to pay VAT on items that you purchase, and cannot claim anything back from the Government.
If you are funded by a donor that has an agreement with your Government, (eg USA and Uganda), you may be able to claim back VAT you have paid.
If you make sales, or your beneficiaries contribute to the cost of services (drugs, medical services, publications, T-shirts, training courses, consultancy etc) we recommend that you take professional advice on whether or not you are required to charge VAT, or if it has an impact on VAT you may be able to claim back.
Some suppliers fraudulently add VAT onto their invoices when they are not VAT registered, because NGOs often pay it without asking questions.
Make sure that any invoice that has VAT added also has a VAT number on it. If you have suspicions about the validity of the VAT number, report it to your tax authority.
In some countries, organisations purchasing specific services are required to keep back a percentage of the price and pay it over to the tax authority directly. The supplier may then count this as a tax credit in their own year-end tax return. If you withhold tax from a supplier’s invoice you should remit it to the tax authority, obtain a receipt and a tax credit advice note, and send the tax credit advice back to the supplier.