New Regulations Governing Overseas Donations to Chinese NGOs

Late last week, when the State Administration of Foreign Exchange released new regulations (right click to download here) governing how China based NGOs register their inbound donations, several media outlets (AP, SF Examiner, and SCMP) put out coverage that would leave many to believe that this new regulation was going to have an immediate and negative impact on NGOs operating here:

“China has surprised thousands of aid groups by stepping in to regulate overseas donations for the first time, complicating efforts to get money from supporters in the United States and elsewhere. Some groups warned that losing the support could force many to shut down.”

The regulation, which was pretty benign in nature, was viewed as another tool that would be used to clamp down on NGOs, and their activities in China, and they offered a number of expert opinions as to the severity of the impact.

However, after reading the regulations through, I am still unsure.  Not unlike many other regulations in China, this one is very loosely worded, non-specific about who exactly will oversee the implementation, and leaves a lot of room for loopholes.

And while it is a regulation that is by its very nature meant to “limit” activities, or perhaps better record is a better term, and while that typically has meant a more restricted environment for industries in the past, I am also unsure that this regulation would achieve that either.

In fact, depending on how one would lie to read this, it is entirely possible that this new regulation could end up supporting the development of NGOs in China. Which would be a good thing!

First a few operational things to point out:

1) Even if one were to take this document at face value, and with a negative line, the fact is that this document would fail to have much of an impact anyway as it fails to accurately account for how donation transactions occur.  this document, if you read it letter for letter, is meant to force local NGOs to go to bank and submit a document that would certify the inbound donation.  If this is done in a manner similar to a typical business, then the money would already be in China, but more importantly, the question of where the money originated from was left out of this document as it assumes the donor would be making a direct donation from overseas account to China account.

A transaction that (1) rarely happens without an entity in the middle and (2) fails to follow the facts that foreign donors rarely send money directly to China as they get no tax benefit by doing so.

So the big loophole is that much of the money coming in is in fact not a donation, but an internal transfer between the NGOs legal/ banking center and China.  It would have already have been recorded as a donation overseas, which would negate the technical need to call it a donation in China

Which leads to my first big conclusion.  This regulation is not meant to be the norm, at this time, but to be used against the exceptions.  that, rather than push and effectively monitor all NGOs, what this document will do will give a tax auditor (or some other agency) a regulation that they can use against a specific NGO / group as part of a “normal” investigation of their operations.  Should any donations from overseas group come up, particularly those that are in the gray area, then the NGO could be presented with this regulation.

2) In comparing this new regulation to others worldwide, I would have to say that this document in its current form is still very lenient in its intensity.  Yes, it is technically “possible” that donors would have to present themselves in China, but for anyone who has ever donated money across the U.S. border you will know that the paperwork involved in that process (called equivalency) is far more cumbersome to the donor and benefactor.

Where this document gets interesting for me is that it could potentially open a door for NGOs in a very positive manner.  That, with one of the big issues being NGOs forced to registered as corporations, and their donations being taxed as a result (booked as revenues), this regulation could unwind that.  That, thorough the regulation, tax authorities would now have a document that say that NGO XYZ received 123 from Donor ABC on DATE, and with the SAFE seal on that document, the NGO would have the ability to strip that donation out of their revenue and thus reduce their tax burden.

Also, and this is thinking bigger picture and longer term, the setting up of donation accounts is a new piece of infrastructure that could be build upon for legal and tax regulations rumored to be in development.  Another step in the right direction as well.

In the end, what is clear is that China is now looking to develop mechanisms that can create strength in how NGOs are regulated.  for some, this is going to be viewed in a negative light because for some the gray areas that they occupy are comfortable.  However, if this document leads to other steps like legal and tax regulations, and the removal of tax burdens, then I would say that the fears of many will quickly turn themselves into hope for the future.  That does not mean that there are not more hurdles to come, but baby steps are being taken.

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