Wednesday, December 7, 2011

Mexico: Lack of tax incentives discourages giving

December 1, 2011 2:30 pm
By Adam Thomson

A few years ago, when Carlos Slim was asked about philanthropy, the Mexican telecoms billionaire said he disagreed with “going around like Santa Claus”. His views seem to have changed little since then.
“Poverty doesn’t go away with charity, social services, paternalism or speeches,” the world’s richest individual told the FT in June this year.
“You can only defeat poverty with jobs and with people who create jobs.”
To judge by some studies, many of his countrymen feel the same way. Mexico may have a $1tn economy, be home to 112m people and at least 12 billionaires. But it also has some of the world’s most frugal givers.
According to a 2003 investigation by the US-based Johns Hopkins Comparative Nonprofit Sector Project, private donations to the country’s not-for-profit sector are equivalent to just 0.04 per cent of gross domestic product – about 40 times lower than in the US, and the lowest in the Johns Hopkins study of 35 developed and developing countries.
Regional peers such as Brazil, Argentina and Colombia, which were also in the study, give considerably more on a proportional basis.
As Michael Layton of the philanthropy unit of Mexico City’s Itam university says: “The sector is really under-developed in Mexico and that makes it hard to get things moving.”
One of the problems is that few people pay taxes. With a large informal sector and plenty of loopholes in the tax code, it is little wonder that Mexico has one of the lowest takes in the region – less than 10 per cent of GDP a year excluding oil revenues.
This is a challenge for philanthropy: legislation that allows Mexicans to deduct donations from their tax bills – an approach that works in the US – is much less effective. As Mr Layton puts it, “the tax incentive is hollowed out”.
Moreover, the not-for-profit sector is small, even by Latin American standards. According to the finance ministry, there are only about 5,000 organisations that are legally registered to receive tax-free donations. Compare that with 50,000 in Ecuador, a country of 15m people.
Lourdes Sanz of the Mexican Center for Philanthropy argues that part of the reason is that national laws impose many rules on organisations that want to register with the finance ministry. For example, they have to renew their registration every year, generating paperwork.
They also have to obtain a letter of approval from one of the government’s ministries but few ministries are legally able to provide this.
Not only that, but registered organisations cannot spend more than 5 per cent of their donations on administrative costs – a level far below what most international not-for-profit organisations consider viable.
Ms Sanz concludes, “the institutional side of giving in Mexico is very weak”.
Francisco Marmolejo at the University of Arizona, an authority on higher education, says that the resulting low levels of philanthropy could spell serious problems for Mexico’s relatively young population, nowhere more so than in education.
“There is a huge demand for educational services, but governments in Latin America cannot provide adequately because of competing needs,” he says.
“Philanthropy could help fill the void, but there is not enough of it in Mexico.”
So acute is the lack of philanthropic funding for education that some universities have had to come up with novel alternatives.
For example, the Tecnológico de Monterrey, one of the country’s best known universities, has gone to the extraordinary measure of funding part of its monthly salary bill through a lottery system.
Like many things in Latin America, there is a certain lack of clarity over Mexico’s philanthropic sector.
Donations to the Catholic Church are not included in many statistics, a fact that probably underplays significantly the amount that Mexicans give away.
And donations to help people affected by natural disasters tend to be generous.
There are also several notable examples of Mexican billionaires working with regional governments on development programmes.
In spite of his public disdain for charity, Mr Slim has two foundations, with an endowment of at least $5bn.
Among other things, they fund health and education programmes throughout Mexico.
Ricardo Salinas Pliego, one of the country’s wealthiest businessmen, has joined forces with the state government of Chiapas to build urban communities to provide basic services to people who once lived in rural areas.
But in a recent interview with the FT, Mr Salinas Pliego admitted that philanthropy in Mexico was not easy. “In the rest of the world, rich people will give a donation and businessmen give to charities,” he said.
“But in Mexico, the execution capacity of what we call the social sector is missing. I find it much more effective to set up the actual social organisation and then fund it with my money.”

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