Cohesion needed for regulation of charity sector

Two important events took place in 2024 that had significant implications for the charitable sector in Kenya: the commencement of the Public Benefits Organisations Act, 2013 on May 14, and the gazettement of the Income Tax (Charitable Organisations and Donations) Rules, 2024 on June 18. These laws were expected to create a cohesive legal framework for charitable organisations in Kenya.

Nevertheless, the two laws have created two parallel, and often conflicting, processes administered by the Public Benefit Organizations Regulatory Authority and the Kenya Revenue Authority (KRA). It is a case of two agencies claiming authority over the same substantive issue — the definition of "public benefit."

The PBO Act was a landmark, promising a modern, supportive framework for the non-profit sector and recognising a contemporary list of 28 charitable purposes — from conflict resolution and environmental conservation to the advancement of human rights. Critically, it establishes the PBO Authority as the primary regulator.

Meanwhile, the KRA, under the Income Tax Act, determines what qualifies as a “charitable organisation” for tax exemption. The 2024 rules codify the English common law definition of charity, focusing on four narrow heads: relief of poverty, relief of distress of the public, and advancement of education and religion.

The KRA rules, while rooted in common law principles like exclusivity of purpose and the public benefit test, have chosen rigid certainty over necessary evolution. By detailing an exhaustive list of what constitutes 'relief of distress of the public,' the Income Tax Rules have frozen Kenyan charity law in time. This is a regression.

Historically, the charitable category of 'relief of distress of the public' — though not as broad as the common law's dynamic fourth category of 'other purposes beneficial to the community' — nevertheless allowed the development of charitable purposes in Kenya. In contrast, the PBO Act's Sixth Schedule provides a non-exhaustive list, allowing for organic development of charitable purposes in a changing society.

Promoting social justice

Nonetheless, the PBO Act's approach, is also vague. Its list of 28 purposes lacks definitions, creating ambiguity. Without clear definitions, purposes like "governance" or "information" may be interpreted arbitrarily by the Public Benefit Organizations Regulatory Authority, leading to legal uncertainty.

As a result, a charitable organisation must satisfy two different authorities. It can be registered by the PBO regulator for a purpose like “promoting social justice,” but denied tax-exempt status by KRA because this purpose is deemed too political or vague under the strict, traditional common law. 

Nowhere is the conflict starker than in the treatment of grant-making organisations. The PBO Act implicitly recognises a diverse charitable ecosystem, where some organisations exist to fund others engaged in implementing activities on the ground.

However, the Income Tax 2024 Rules are antithetical to this model. Rule 23 explicitly states that “an organisation that exclusively funds another charitable organisation shall not be granted exemption.” 

A further contradiction emerges around advocacy. The PBO Act rightly acknowledges that influencing public policy is legitimate and essential for a healthy civil society. It allows PBOs to engage in advocacy, provided it does not involve partisan politics.

Yet the common law principles in the Income Tax Rules consider any “political” purpose non-charitable. Thus, an organisation advocating for climate change policy could be registered by the PBO Authority but denied tax benefits by KRA.

This dual system burdens charities. To access all benefits, an organisation must first navigate the Public Benefit Organizations Regulatory Authority registration process and comply with its 28 purposes.

Future charitable innovations

Second, they must go through KRA's process, complying with the three heads of charity (religious purposes are prohibited under the PBO Act) and common law principles.

Third, there is the risk that a purpose approved by the PBO Authority might be challenged by KRA for not meeting the "relief of public distress" test or being "political."

Fourth, organisations must structure purposes and activities to satisfy both the PBO Act's expansive list and the Income Tax Rules' narrower definitions.

A resolution is urgently required and I propose a three-step solution:

Parliament should amend the Income Tax Act to recognise registration under the PBO Act as definitive proof of charitable status for tax purposes.
The National Treasury and KRA should revisit the 2024 Rules, review Rule 13 for adaptability to future charitable innovations, and repeal Rule 23.

The PBO Authority should issue guidelines interpreting the 28 purposes, incorporating common law principles for consistency and fairness.

Kenya’s charitable sector is an important sector that facilitates citizens to express their compassion and commitment to a better society. A cohesive legal framework is critical in ensuring that it thrives. 

The writer is a consultant specialising in non-profit governance, risk and compliance. [email protected]