In early July 2017, the President of Ukraine introduced two urgent draftlaws (№№ 6674, 6675), which are related to legal basis of operation of public associations in Ukraine.
OPORA supports the strengthening of transparency and accountability of both the power and non-governmental organizations. However, adoption and implementation of the current draftlaws №№ 6674, 6675 will lead to negative consequences in the field of development of civil society in Ukraine. In particular, it comes about discrimination of some categories of associations of citizens, bureaucracy of interaction process between NGOs and regulatory authorities, weakening of an opportunity to act autonomously from the state. The above-mentioned legislative initiative poses a threat to ability of the non-governmental sector to provide program activities independently and free from excessive state interference. In addition, provisions of the draftlaws do not meet the requirements of international standards on operation of international and foreign organizations due to the fact that it encourages entrepreneurs to refuse from cooperation with donors of international technical assistance.
Special and exclusive requirements to financial reports of public associations, disproportionate sanctions for breaching the rules of reporting and publication of the annual financial report – are the key shortcomings of the draftlaws.
The initiators of the draftlaws offer to turn the international standard down. According to the above-mentioned document, public associations should comply with the common law requirements for operation of all legal entities. Attempts to distort the principle of equality and non-discrimination in terms of the state’s treatment towards public associations can significantly worsen activity conditions of NGOs. Moreover, it can provoke politically-motivated abuses by the authorities.
The draftlaw does not have complex solution to the problem of transparent funding of all groups of NPO. It selectively provides new requirements exclusively to public associations. At the same time, the current reporting system of public associations is neither simplified, nor unified.
The offered sanctions for breaching the rules of reporting and publication of the annual financial report are disproportionate. At the same time, an application method, which is used by supervisory authority, is unacceptable. Deprivation of non-profit status, tax charges and fines can block the operation of independent non-governmental organizations or lead to its elimination. Instead, an absence of opportunity to rectify any oversight or error and submit updated report – is a direct violation of the state's obligation not to interfere, but facilitate the activities of non-governmental organizations.
OPORA calls on the Verkhovna Rada of Ukraine, the President of Ukraine, the Cabinet of Ministers to hold out against introducing dubious innovations in legal provisions on operation of public organizations. Discussions on transparent funding and efficiency of usage of international technical assistance should lead to formation of clear, univocal and politically neutral standards for transparency of the public sector.
Under the conditions of growing conflict in political process, we have to retain and strengthen independent civil institutions that can objectively inform society about important stages of the state's development.
A list of the offered amendments can be found at the end of this document.
Provisions of the draftlaws discriminate public associations via sanctions and requirements, which were created exclusively for them
Amendments to the legislation (draftlaws №№ 6674, 6675) oblige public associations to publish an annual financial report of its operation and to submit it to the State Fiscal Service. The above-mentioned innovation, which was provided by the authors of the draflaws, would be related exclusively to public associations, which are regulated by the special Law of Ukraine "On public associations". It is not planned to empower professional and creative unions, religious organizations, charitable and budgetary organizations, other legal entities to fulfil the corresponding obligation. Moreover, these subjects will not be punished for its violation.
Equality before the law and the state authorities of all public associations, which must be subject to common general rules and requirements, - is the basic international standard.
In particular, according to para 23 of the Explanatory Memorandum to Fundamental Principles on the Status of Non-governmental Organisations in Europe, any act or decision affecting an NGO must be subject to the same administrative and judicial supervision as is generally applicable in the case of other legal entities. There should be no need for special provisions to this effect in legislation on NGOs. Moreover, it is provided that NGOs must be subjected to ordinary domestic law.
Universally accepted principle of operation of public associations is not reflected in provisions of the draftlaws. It will allow other legal entities not to report and disclose financial information. In particular, it is offered to leave a wide range of non-profit organizations, which are funded by various sources, aside. Moreover, it will be exempted from the state income tax (namely, budgetary organizations, professional and creative unions, religious organizations, charitable organizations, and other groups of companies, institutions and organizations).
The explanatory note does not provide convincing justification of the need for introducing a new financial reporting exactly for the one group of non-profit organizations. The last peculiarity of the draftlaw allows us to assume that it comes about selective and politically motivated approach to legislative amendments.
The obligation of annual financial reporting by public associations, which is prescribed by the draftlaw, is related to prospects of its losing the non-profit status by decision of the supervisory authorities (in case of non-submission to corresponding body or non-disclosure of annual financial report on the official website).
The current version of the Tax Code provides the same five grounds for losing the non-profit status, including a distribution of revenues (profits) or portions thereof among the founders (participants) and members of the organization's and its employees; using of profit for purposes other than intended and / or contrary to the terms or purposes of organizations. The draflaws No. 6674, 6675 includes another ground for exclusion public associations from the Register of Supervisory Authority of Non-Profit Institutions and Organizations. Non-submission of annual financial report or non-compliance with requirements for its content or disclosure.
The special reason for losing the non-profit status, which is not applicable to other non-profit organizations and was prepared exactly for public associations, breaches the principle of equal state’s treatment According to the Guidelines on Freedom of Association,the differential treatment of different associations is discriminatory if it has no objective and reasonable justification, that is, if it does not pursue a legitimate aim or if there is no reasonable relationship of proportionality between the means employed and the intended aim. Considering the interest of society in ensuring financial transparency of both public associations and other legal entities (in particular, budgetary organizations with the non-profit status), the absence of such justification is obvious.
The powers of the supervisory authorities can become excessive, meanwhile public associations will not be able to rectify any oversight or error without losing the non-profit status
According to the draftlaws, public associations (with the income more than 300 minimum subsistence level for able-bodied people) will be deprived of the non-profit status in case of non-submission or non-disclosure of annual financial report with a complete list of mandatory information.
In addition, the legislative initiative duplicates provisions of the current Tax Code in terms of an opportunity to exclude public association from the Register of Supervisory Authority of Non-Profit Institutions and Organizations if it uses profit for purposes other than intended and / or contrary to the terms or purposes of organizations (prescribed by the current legislation and constituent documents).
The offered provisions do not distinguish cases of non-submission of financial report by public associations from providing incomplete information. Exceeding the term, which is prescribed by the law, of submission of a proper report – it is another possible option for sanctions. Public associations can be deprived of the non-profit status because of any violations, including technical inaccuracies.
The authors of the legislative initiative do not provide public associations with an opportunity to rectify any oversight or error via submitting an updated report. There is also no opportunity to prevent or charge small penalties before making a final decision on deprivation of the non-profit status.
Such way of legal regulation of public financial reporting of organizations contradicts the relevant standards of legal regulation.
According to the Guidelines on Freedom of Association, in case of the non-compliance with requirements for reporting, the legislation, policy and practice of the state should provide associations with a reasonable amount of time to rectify any oversight or error. Sanctions should only apply in cases where associations have committed serious infractions and should always be proportional. The document gives an example of proper response of authorities to breach of a legal requirement to submit financial statements by an association.The first response should be to request rectification of the omission(s); a fine or other small penalty.More generally, any penalties for the late or incorrect submission of reports, or other small offences, should never be higher or harsher than penalties for similar offences committed by other entities, such as businesses.Comparing the relevant standards and the offered draftlaws, we can make a clear conclusion that it comes about two opposite documents.
Such a discrepancy can be defined by three main parameters: 1) supervisory authorities will be able to make a decision on deprivation a public association of non-profit status individually without prior interaction; 2) there will be no option for public associations to rectify any oversight or error in financial report; 3) in comparison with other legal entities, public associations are discriminated not only in terms of mandatory providing additional financial information, but also during the introducing the sanctions. Consequently, adoption of current versions of the draftaws will lead to a violation of the equal state’s treatment principle and the principle of proportionality.
In case of adoption of these two draftlaws, deprivation of non-profit status of a public association will not become the only sanction in case of the non-compliance with requirements for annual financial reporting. In addition, public associations will be obliged to pay tax liability and penalties for the entire reporting period, when the report has not been submitted and / or disclosed.
Deprivation of non-profit status, tax liability and penalties can destabilize the operation of a non-governmental organization or lead to its liquidation.
A complex of discriminatory norms and disproportionate sanctions allow us to make a conclusion that provisions of the draftlaws do not meet the obligations of national governments to facilitate activities of NGOs.
The draftlaw does not meet the international standards of deregulation of public association activities
According to the Guidelines on Freedom of Association, the state shall also facilitate the exercise of freedom of association by creating an enabling environment in which associations can operate. This may include simplifying regulatory requirements, ensuring that those requirements are not unduly burdensome.
In contrast to international standards, amendments to the current legislation provide introducing of a new financial report, which will complement the current system of reporting of public associations to supervisory authorities.
According to the current legislation, public associations are obliged to report to a wide number of supervisory bodies, including various and regular reports to tax authorities, statistical bodies, state authorities in the field of employment of citizens, social protection of disabled people, distribution of humanitarian assistance, the Ministry of economic development and trade of Ukraine, etc.
Depending on the nature of activities, public associations should also submit plethora reports, which include comprehensive information about its operation and sources of funding. Nowadays, interaction with supervisory authorities requires significant resources from organizations, including personnel support and legal assistance.
The legislative approach, which is specified in the draflaws, do not meet the goals of deregulation and creating an enabling environment in which associations can operate. Additional requirements and burden will increase the risks of administrative abuse during the process of interaction between public associations and supervisory authorities.
Improving legislation should be ensured by universalization, integration and simplification of the reporting of NGOs. It is important to synchronize efforts in increasing the transparency of funding of public associations with the process of eliminating bureaucratic obstacles for its effective operation.
The draftlaws offer to implement unclear and discriminatory provisions for individual entrepreneurs, who receive income from donors of international technical assistance
It is assumed that such individual entrepreneurs will be obliged to fill in the separate annex to tax declaration and specify the income, donors and amount of payments transferred to third parties, including the list of third parties itself. The annex will include third parties, one-time payments, which exceed 3 minimum subsistence level for able-bodied people.
The above-mentioned annex, which is submitted by individual entrepreneur together with tax declaration, will be published on the website of the supervisory authority. It is also offered to introduce special sanctions for a separate group of entrepreneurs as well as for public associations.
Violation of the requirements for declaration of full information about receipt of funds from international donors by individual entrepreneurs means its switch from the simplified taxation system to general one. An individual entrepreneur will not be able to choose a simplified system during one year from the moment it was detected by supervisory authority.
The draftlaws do not provide an individual entrepreneur with an opportunity to rectify any oversight or error in report independently or after the warning from supervisory authority.
OPORA notes that new requirements for reports of separate category of individual entrepreneurs create more burdensome conditions than for other subjects of taxation. For instance, other legal entities will be able to receive income from donors of international technical assistance, but will not be subjected to additional reporting and sanctions.
Amendments to the draftlaws do not oblige the donor to inform an entrepreneur about the origin of funds. At the same time, it imposes an additional burden and responsibility on individual entrepreneur.
Such a selective approach can lead to conscious avoidance of cooperation with donors of international technical assistance and its institutions by individual entrepreneurs.
The above-mentioned course of events related to interaction with certain categories of entrepreneurs will worsen practical conditions of operation of international organizations, which have legitimate, socially useful and legal goals of work in Ukraine. It will also violate relevant standards on regulation of international and foreign organizations activities at the level of national legislation.
Violation of the inclusiveness principle during the process of formation of legislation on operation of public associations
According to the Guidelines on Freedom of Association, it is emphasized that the need for restrictions shall be carefully weighed, therefore, and shall be based on compelling evidence. The document provides that the least intrusive option shall always be chosen.
According to these standards, associations and their members should be consulted in the process of introducing and implementing any regulations or practices that concern their operations. Furthermore, such consultations should be meaningful and inclusive, and should involve stakeholders representing a variety of different and opposing views. During the working out of these draftlaws, such consultations have not been fully carried out. In particular, it requires additional efforts to restore the inclusiveness of the dialogue for the sake of perspective amendments to legislation.
Besides the proportionality of sanctions, powers of supervisory authorities and discriminatory provisions, it is important to form a consensus concerning the list of information, which should be included in reporting.
According to the Explanatory Memorandum to Fundamental Principles on the Status of Non-governmental Organisations in Europe, reporting requirements must be tempered by other obligations relating to the respect for privacy and confidentiality. Any exception to business confidentiality or to the privacy and confidentiality of donors, beneficiaries and staff shall observe the principle of necessity and proportionality.
Volumes of disclosure of information must be publicly agreed. Moreover, it should take into account the specifics of work with different target audience. In particular, it should be investigated the positions of NGOs, which operate in the field of human rights protection, provide victims of intergovernmental armed conflict or captives with assistance, etc.
Verification of the list of information in financial reporting of public associations is also important for proper and unified appliance of sanctions. Cases of non-disclosure of information, which is directly related to financial transparency issues, are considered to be acceptable and corresponding to the proportionality principle. Other minor cases of violation the requirements should not become a formal reason for serious restrictions on operation of a public association.
Brief description of the bullet points of the draftlaw
The draflaws №№ 6674, 6675 offer:
- To oblige public associations to publish an annual financial report of its operation and to submit it to the supervisory authority.
- To oblige public associations (with the income more than 300 minimum subsistence level for able-bodied people) to submit and publish relevant reports.
- To submit a wide range of information, including total income of organization (including international technical assistance), total expenditure, number of employees and total labour costs, the list of ten workers with the highest salary rates, number of members of a public association and amount of the membership fees, composition of governing bodies, participation of heads of the association in governing bodies of other
- To deprive public association of the non-profit status in case of non-submission or non-disclosure of annual financial report. There is no opportunity to submit updated report or rectify any oversight or inaccuracy.
- To oblige public associations to pay tax liability and penalties for the entire reporting period, when the report has not been submitted and / or disclosed.
- To oblige individual entrepreneurs to fill in the separate annex to tax declaration and specify the income, donors and amount of payments to third parties, including the list of the third parties itself.
- Violation of the requirements for declaration of full information about receipt of funds from international donors by individual entrepreneurs means its switch from the simplified taxation system to general one. An individual entrepreneur will not be able to choose a simplified system during one year from the moment it was detected by supervisory authority.