In Italy, there is currently a campaign, led by what is probably the country’s leading daily newspaper, Corriere della Sera, to give tax exemptions to organisations working in what is referred to as the third sector. These tax exemptions would include exemptions from VAT as well as income tax. The intention is to take this campaign to the European Parliament to achieve an EU-wide rule that non-profit organisations should be exempt from direct and indirect taxation.
One may ask why this issue is so important and pertinent to the economy when one considers that such non-profit organisations are involved in social work rather than production activities. I believe that one needs to dissect the issue in its various components to be able to understand it.
In Malta, we must give more space to social enterprise, because it could serve as an important vehicle for business start-ups
The first component is which organisations are we talking about. What is meant by a non-profit organisation or by the third (not tertiary) sector? I am using the two terms as they tend to be used interchangeably. Non-profit organisations are called such not because they do not generate a surplus of income over expenditure, but because that surplus is not given to an individual owner/s in the form of profit.
In the study of economics, profit is seen as a reward for entrepreneurship, just like wages are seen as a reward for labour. In a non-profit organisation, there is no individual person that needs to be rewarded for his or her entrepreneurship.
In fact, the reference to the third sector is to distinguish it from the public sector and the private sector. Although at times the third sector is sometimes referred to as the voluntary sector, this does not mean that persons working in this sector do not get paid. In fact this is where the economic significance of this sector lies.
To place things in perspective, it is worth noting that the third sector accounts for around 9 per cent of the gross domestic product in Ireland.
In Italy, the third sector is becoming an important source of employment for young persons. In the US, 10 per cent of the GDP is attributed to the third sector.
This brings me to the second component of the whole problem, which is the tax treatment of such organisations.
In several instances, and Malta is one of them, such organisations are VAT-exempt without credit.
This means that they do not charge VAT for their services. However, they do pay VAT on their purchases, which VAT is not recovered. This puts them at a disadvantage rather an advantage, as a private sector business, can offset the VAT it charges its customers with the VAT it pays its suppliers.
In other countries the third sector has to pay tax on its surplus income, even though this income is reinvested into the organisation and is not distributed to an individual person. This hits at the heart of what constitutes the third sector and what distinguishes it from the private sector, which by its very nature is driven by the need to maximise profits for the benefit of the shareholders.
The problem with such exemptions is the loopholes that they could potentially create. Such loopholes can only be closed if third sector organisations are given a legal framework with strict parameters as to what or what does not constitute a non-profit organisation.
Over the years, the third sector has taken various legal forms. There are cooperatives, associations, foundations, etc. Unfortunately, in some countries, each of these forms tends to have a law that regulates them, such as the Cooperatives Act in Malta. There is now pressure to give more substance to the term social enterprise in order to create this one legal framework.
Where there is recognition of this term, it is accepted that social enterprises use the methods and practices of business and the power of the marketplace to achieve their objectives, just like any other enterprise.However, given their non-profit status, their primary purpose is the common good.
Therefore social enterprises tend to be closer to the community in which they are operating and tend to address social issues that would otherwise be left not served. One of the best examples to take is education, in its broadest meaning possible.
In Malta, we must also give more space to social enterprise, because it could serve as an important vehicle for business start-ups.
One hopes that the initiative taken by the Corriere della Sera will actually lead to an EU-wide recognition of this form of enterprise, which is judged by many to be an important outlet for some of the skills available in an economy.