If you are like every other social impact business owner in Lebanon, you are somewhat of an odd duck:
- You talk about profits and social impact in the same sentence.
- You raise eyebrows when talking to most people.
- You raise suspicions when talking to the tax authorities, accountants and auditors.
There is no legal framework in Lebanon governing social impact businesses.
If you started working with a non-profit organization, you will soon notice awkward limitations in relation to recognizing revenue.
You will be advised to launch a SAL or SARL.
“To be on the safe side”
Soon the tax authorities may assume that you have set up a convenient way to evade tax on profits by channeling non-taxable revenue into your NGO. They even may ask you to register the NGO in VAT (this did happen to yours truly, of course!).
Every grant received from the United Nations, embassies and a myriad of other donors becomes subject to VAT.
Your grant budget is automatically slashed by around 11% because most donors will not agree to increase your budget to take into account tax dues.
This needs not to be the case.
Only recognize a tiny portion of incoming funds as revenue; the rest is money that was given to you to spend, on behalf of someone else.
The fine print
Who is this for?
- SAL or SARL companies
- NGOs receiving grants
Book all money coming into the entity as an obligation to spend on behalf of the donor, according to a strict budget and guidelines. Leave out a portion to be booked as management fees that are themselves VAT-able.
Every auditor/accountant will want to be “conservative”, “be safe rather than sorry” and ask you to book the entire amount as income and lose 11% of the grant in VAT.
In most cases, this is at least inaccurate, and at most not compliant.
As long as your contract:
Clearly mentions that it’s a grant/donation and not a service contract
Has a pre-approved detailed budget in an appendix
Dedicates one budget line that is for discretionary (usually around 6-8%), organizational spending, sometimes called “overhead”
Then you have a strong case to argue that your actual income, against the management service provided, is restricted to that portion mentioned in step 3 above and that you should only pay VAT on it and not the full 100%.
It can be confusing so this table will guide you in making that distinction.
You will find challenges with particular expenses that are bound to be registered as expenses when backed with a contract. Here is a basic list of some of those and how we suggest mitigating against them:
Rent expense: replace your municipality registered lease with a co-working contract (better yet, preserve social distancing and eliminate your rent expense all together)
Salary expense: this is a point of contention, as you want to be compliant with the MoF, NSSF, but more importantly, you want to be fair in remunerating the employees themselves. We suggest going for contract work, as much as possible (outsourcing as opposed to formal employment contracts).
Audit/legal: Largely unavoidable expenses.
What happens when you definitely have to expense?
Recognize additional revenue (in case the 6% to 8% portion mentioned above does not cover the added expense) and incur VAT on that additional portion. It should be the lowest possible amount required to cover the essential expenses incurred in the section above.
Important notice and disclaimer: The information contained in this article is only intended to give the reader general guidance on matters of interest for his personal use. The latter accepts full responsibility for its use. The application and impact of laws can differ substantially depending on the specific facts involved in each case. This information might contain delays, omissions or inaccuracies due to the changing nature of laws, rules and regulations, and/or the inherent hazards of electronic communication. Consequently, the reader understands that the authors and publishers of this article are not herein engaged in rendering legal, accounting, tax, or other professional advice or services. Therefore, it does not constitute, and should not be used as, a substitute for consultation with professional accounting, tax, legal or other competent advisers.