Navigating Between Taxation and Philanthropy for the Wealthy

What is Philantrophy?

Philanthropy is defined as voluntary action for the public good, focusing on improvement in the quality of human life and addressing the roots causes of social problems, rather than merely alleviating suffering caused by those problems. It represents a strategic, long-term approach to solving societal challenges, distinguishing itself from charity by aiming at problem-solving persistence (Sciortino, 2017). The purpose of philanthropy is truly to improve human welfare and focus on providing solutions to long-term issues, especially for social problems, so as to create positive change for society.

The motivations for engaging in philanthropy are manifold. The rationale for becoming a philanthropist may stem from a desire to contribute to societal social responsibilities, religious and moral convictions, or even the pursuit of social acknowledgment and tax benefits. Philanthropy can take various forms, including:

o   Financial Donations: This is the most common form of philanthropy, where individuals or organizations give monetary contributions to nonprofit organizations, educational institutions, health initiatives, and others.

• Volunteerism: Spending time working voluntarily on various projects or programs that support social causes.

• Corporate Philanthropy: Companies that donate a portion of their profits or other resources such as employee time to volunteer activities, or provide in-kind support, such as free products or services to nonprofit organizations.

• Foundation Establishment: Some individuals or families establish philanthropic foundations to manage their giving in a more structured and sustainable way.

The Wealth and Philantrophy (Asia – Indonesia)

In 2023, Asia established the Philanthropy Asia Alliance (PAA), which includes more than 80 philanthropic organizations from around the world. Initiated by Temasek Trust, the Philanthropy Asia Alliance has successfully raised 1 Billion Singapore Dollars from its members. Among the Indonesian philanthropic organizations that have joined this alliance are the Tanoto Foundation and Sinar Mas. The existence of this association reflects the ongoing development and increasing need for philanthropic activities over time.

In Indonesia, according to the Association of Organizations and Individuals "Philanthropy Indonesia," philanthropic activities have continued to increase up to the present. Based on data from the Reporting on the value of Assistance, Contributions, or Grants reported by taxpayers in their annual tax returns, contributions made by individual taxpayers are greater than those made by corporate taxpayers. This indicates that the potential interest in philanthropy in Indonesia is still quite high, especially among the wealthy individuals in Indonesia.

Pressure over Tax Regulation for the Wealthy

As time goes by, Indonesia has increasingly enhanced its effectiveness in generating national revenue, particularly from taxation. Recently, there have been frequent news information about taxes that will be imposed on wealthy individuals through certain policies, commonly referred to as "Wealth Tax." One often-discussed concept of the Wealth Tax involves a tax on wealth calculated from assets after deducting liabilities. The proposed tax rules could have a significant impact on wealthy individuals in Indonesia.

According to research conducted by Hansson (2010), a Wealth Tax can have a negative effect on economic growth because many wealthy individuals may be disinclined to save or invest due to facing double taxation, which is Income Tax and Wealth Tax from assets accumulation. Currently, in Indonesia, regulations regarding wealth tax have not been implemented, however, the concept of "Wealth Tax" aimed at fairness in societal welfare has been adopted by the government through the implementation of Luxury Goods Sales tax (PPnBM), Land and Building Tax, and Income tax with certain brackets.

Based on Government Regulation Number 58 of 2023 on the Income Tax Withholding Rates Article 21 related to Income from Work, Services, or Activities of Individual Taxpayers, the government has made changes to the rules for calculating income tax for individuals. From this regulation, it can be seen that there are various tax rates according to the income range of each taxpayer. The higher the income of the taxpayer, the higher the tax rate imposed. The highest tax rate according to this regulation is 34% for incomes starting from 1.4 billion rupiah per month. In line with the government's aim to instill a sense of fairness in taxing its citizens, it is evident that the higher an individual's income, the higher the tax rate will be charged.

Furthermore, there are rules related to the Tax on Luxury Goods Sales. This tax is imposed on luxury goods to producers for producing or importing goods in their business activities. According to the Fiscal Policy Agency of the Ministry of Finance of the Republic of Indonesia, one of the considerations for imposing the Luxury Goods Sales Tax (PPnBM) is to ensure tax fairness between low-income consumers and high-income consumers. Similar to the tax rules related to the Land and Building Tax, which imposes taxes on the ownership of property or assets, the higher the value of the building or land owned, the greater the tax payment.

Benefit of Philantrophy from Tax perspectives

In Indonesia, there are several tax incentives for donations, where donations can reduce the amount of taxable income or even be considered as not subject to tax under certain conditions.

1.    Income Tax

• PPh 21: Based on government regulation number 93 of 2010, Article 3, it is stated that the value of contributions can be deducted from gross income with a maximum limit of 5% of the fiscal net income of the previous tax year.

2.    Non-Taxable Objects

• Donations in the form of gifts or grants given to family relatives in a direct lineage of one degree and certain nonprofit organizations can be excluded from income tax.

Taxation for the Philantropy
Deductible Expenses	Non-Object
Scholarship Expenses	Gains from the transfer of assets in the form of grants, assistance, or donations, as long as they are received by family blood relatives in a direct lineage of 1 degree or social institutions.
Donations (national disaster, research and development, educational facilities, sports, and social infrastructure development);
Donations paid to Zakat Institution

Based on the table, the giver or donor can deduct their philanthropic activities in tax calculations, such as donation expenses for national disasters, research and development, educational facilities, and others. Additionally, there are expenses for scholarship donations and zakat given to zakat management organizations for religious contributions. The giver will get benefit from tax advantages with the tax object exemptions when there are transactions of grants, donations, or asset transfers given to family descendants, religious bodies, educational institutions, social organization, including foundations, cooperatives, or individuals running micro and small enterprises (UMKM) under certain conditions.

The impact of Philantropy

Essentially, taxpayers must always comply with the applicable tax regulations. Taxes are often considered as an Expense by taxpayers, both individuals and companies. Therefore, many taxpayers try to minimize or reduce their tax obligations. Taxpayers can reduce their tax payments in two ways: legally (Tax Planning & Avoidance) or illegally (Tax Evasion). As responsible taxpayers, one should not engage in tax evasion; therefore, the choice to be made is to utilize tax loopholes for Tax Planning/Avoidance or be willing to pay taxes according to the determined amount.

As a taxpayer, there is another aspect related to taxation, which is philanthropic activity. Philanthropy can be an option for wealthy individuals and companies in managing their fund expenditures or become an alternative besides paying taxes. When paying taxes, the impact obtained by the taxpayer is more related to proof of compliance in fulfilling their tax obligations. In contrast, philanthropic activities, whether by wealthy individuals or companies, can have a broad impact on them. Philanthropy is considered a positive activity and has a good impact on society, thus it can influence the image and reputation of philanthropists.

According to Porter and Kramer (2002), in their article in the Harvard Business Review, argue that corporate philanthropy is often viewed as a flawed strategy or misaligned with the true spirit of philanthropy. The reason behind this perception is the challenge companies face in reconciling the goals of philanthropic efforts aimed at enhancing company profits with the advantages these efforts are supposed to offer to societal issues. Nonetheless, Porter and Kramer (2002) elaborate on successful philanthropic approaches for corporations, specifically highlighting the concept of Context-focused philanthropy.

Philanthropy can initially focus on identifying which social issues will be assisted, and then utilize aspects of the company that can support such philanthropic practices, thereby maximizing the impact of its activities as well as strengthening the competitive context of the company. There are several competitive advantages for companies engaging in philantrophy, which is:

1. Improves Competitive Context: Strategic philanthropy can improve the quality of the business environment where a company operates. By addressing social issues that affect its corporate context, a company can align social and economic goals, leading to long-term business benefits. This approach can enhance a company's competitive position relative to others in the industry.

2. Leverages Unique Corporate Capabilities: Companies can use their specific strengths, resources, and relationships to support charitable causes, creating social benefits that exceed those provided by individual donors, foundations, or governments. This can include leveraging financial, managerial, and technical expertise, as well as the company's infrastructure and networks.

3. Strengthens Brand and Reputation: Effective philanthropy can significantly improve a company's image and brand in the eyes of consumers, employees, and the broader community. Engaging in cause-related marketing or high-profile sponsorships, when done authentically, can enhance company visibility and employee morale, contributing to a positive corporate reputation.

4. Enhances Employee Morale and Attracts Talent: Companies that engage in meaningful philanthropy can improve morale among existing employees and make the company more attractive to prospective employees who value corporate social responsibility.
   

"From one’s wealth, a path to the stars; through taxes and charity, society thrives."

This proverb highlights two primary avenues through which wealth can be channeled for the common good: taxation and philanthropy. Taxes are portrayed as a necessary contribution to the functioning and well-being of society, funding essential services and infrastructure. Charity, on the other hand, is shown as a voluntary but equally important expression of generosity. Both taxes and philanthropy have their own interests and benefits. On the other hand, these two aspects can also be considerations for wealthy individuals or companies in utilizing their expenditures with their respective preferred objectives.

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