Elucidation of the impacts of the standard for the ratio of expenses for non-taxable activity on the expense allocation behavior of Japanese nonprofit organizations

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Elucidation of the impacts of the standard for the ratio of expenses for non-taxable activity on the expense allocation behavior of Japanese nonprofit organizations

Date: 2 Mar 2023

Associate Professor Makoto Kuroki of the Yokohama City University Graduate School of International Management and Hiroki Natsuyoshi have become the first researchers in Japan to elucidate the impacts of the existence of a standard for the ratio of expenses for non-taxable activities ^*1 for public interest incorporated associations and public interest incorporated foundations^*2(hereinafter “Japanese nonprofit organizations”), and the state of governance in the organizations, on the organizations’ expense allocation behavior.

Points of research results

The study found that Japanese nonprofit organizations at risk of not meeting a 50% regulatory standard for the ratio of expenses for non-taxable activities are more likely to allocate more expenses to expenses for non-taxable activities than to expenses for taxable activities.
The study suggested that approximately 10.8% of Japanese nonprofit organizations may be increasing expense allocations toward expenses for taxable activities and away from expenses for nontaxable activities in order to lower taxable income.
More importantly, the study found that Japanese nonprofit organizations at risk of not meeting the 50% regulatory threshold for the ratio of expenses for taxable activity showed a stronger tendency to allocate expenses to expenses for non-taxable activities when their board of directors was larger.

Explanation of terms
^*1
Ratio of business for public interest purposes: A ratio for determining the extent to which public interest corporations' expenses are for public interest purposes. The ratio is expressed by the formula below. Public interest corporations must demonstrate a ratio of business for public interest purposes of 50% or more in each business year (Article 15 of the Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations). Ratio of business for public interest purposes = amount of expenses for the public interest ÷ (amount of expenses for the public interest + amount of expenses for revenue, etc. + amount of expenses for administration and operations)

^*2
Public interest incorporated associations and public interest incorporated foundations (public interest corporations): Private corporations that act in accordance with the founding principles of corporations for purposes of promotion of the public interest (Cabinet Office, 2019). A public interest corporation’s “principal objective is to operate the business for public interest purposes,” and a business for public interest is a “business of the kind listed in each item of the appended table that relates to scholarship, art, charity or other public interests and that contributes to the promotion of interests for many and unspecified persons” (Article 2, Item 4 of the “Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations”), with 23 businesses stipulated.