donau

D3.4-NGI_TALER-deliverabledonations.txt (31398B)

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 # 3.4 Requirements for donation flow
 
 ## Introduction
 
 ### Scope
 
 The scope of this document is to provide an overview of potential technical requirements for donation systems that wish to collaborate with tax authorities to grant tax benefits to donors to recognised public benefit efforts.
 
 This document is written in the context of the [NGI TALER](https://ngi.taler.net) project, which is based around the electronic payment system GNU Taler. As may be obvious from the underlying acronym "Taxable Anonymous Libre Electronic Resources", GNU TALER bridges two seemingly opposite requirements: providing privacy to citizens with regards to how they spend their money in the digital realm that has the same properties we are used to with traditional cash payments, while at the same time creating a system for organisations which handle financial transactions that is transparent and auditable. This prevents fraud and keeps taxation as a basic mechanism to take action in the common interest and fund public services intact.
 
 GNU Taler is a *digital commons*, based on free software and advanced cryptography. This means that - unlike proprietary products - the software can be adjusted by all stakeholders to carry the properties it should have.
 
 There are two types of donations we will consider. The first is **ad hoc** or **informal donations**, which are made from individual to individual as **one time gifts** typically in appreciation of the work being done by an individual or collective. The second category is **regulated donations** involving at least one *recognised* philanthropic organisation. Both involve voluntary transferral of some financial assets for which no products or services are rendered in return.
 
 In the design requirements we will try to address both types of donations, obviously with the complexity expected to be with compliance with fiscal instruments that stimulate donations to philanthropies triggers.
 
 ### Donations in a human rights perspective
 
 Donating is an important way for people to empower causes they believe in, and facilitate collective action. In many countries, there is explicit recognition of the public benefit of such generosity: a friendly tax treatment of donations. It makes sense: money you immediately give away to a recognised good cause is not income that will be converted by you into private consumption. So conceptually it deserves a different tax treatment.
 
 Donations have many causes, but quite often they are an obvious expression of the human right towards the freedom of thought, conscience and religion. Individual spending can be very intimate and personal, and even aggregate spending habits can reveal a great deal about people. This holds even more so for donating.
 
 Protecting donation confidentiality is therefore important to protect those freedoms. We have to recognise that in some situations the mere fact hat someone has - in private - donated to some cause at some point in their life, can put them at risk in another context. The right to privacy is another critical aspect of donating. International human rights law provides a non-ambiguous responsibility to promote and protect the right to privacy.
 
 Both these righs are anchored in key international treaties and covenants such as the Universal Declaration on Human Rights (Article 12), the European Convention for the Protection of Human Rights and Fundamental Freedoms (Article 8) and many more.
 
 As part of their regular operations as well as their recognition as public benefit organisations, philanthropies are already subject to a variety of audits as well as strict regulatory and fiscal scrutiny. Good causes that don't adhere to these rules, are stripped from any fiscal benefits. At least donations to recognised public benefit organisations may therefore be confidential: donors should be able to freely choose whichever of the approved philanthropies they donate to, without disclosing which.
 
 In cases where donation confidentiality is not (yet) feasible, we will try and provide fallbacks that best serve the interest of donors, gives them choice and respects their privacy as least as good as the current system in place.
 
 ### Protection towards all sides
 
 Privacy threats not only exist on the outside. Not many people are aware that while the causes they support may be worthwhile, not all philanthropies play as nice as one would expect them to towards donors. This happens in particular when such organisations employ third party (often commercial) agencies to help "yield" more donations on a commission basis or as 'fund raisers'. Especially for-profit fund raising agencies tend to resort to questionable social engineering approaches. One common scenario is that after a first donation, such bad actors start to aggressively pressure a particular donor for more - with personalised emails, letters, phone calls and even in person visits. This may happen beyond a single good cause: people that donate are known to be susceptible to a certain proposition, resulting in an avalanche of follow up begging requests.
 
 In the era of data driven donations and corporate social media surveillance, this kind of behaviour has unfortunately become so easy that there are not just pro bono but even paid services (source: [Stichting Donateursbelangen](https://www.donateursbelangen.nl/opzegservice) to deregister and exercise the 'right to be forgotten' after donating.
 
 Even without such excesses, there are many circumstances when people like to donate something to their preferred causes without revealing their identity. Some people just prefer to stay anonymous because of personal beliefs or even religious requirements, or simply don't want to have publicity which might lead to a cascade of begging efforts from fund raisers.
 
 ### Donation confidentiality
 
 Making a financial donation is a deeply personal choice to share part of ones wealth in order to benefit a cause one cares about. Some traditional ways of donating (for instance passing around baskets or even plates in a religious gathering) are vulnerable to group pressure, and door to door fundraising is also confrontational and puts people on the spot.
 
 When donations are devoid of such pressures and there is no need for e.g. virtue signalling, donation confidentiality comes into play. Historically, people wanting to make an anonymous donation might have an envelope with cash or a box of goods delivered. Obviously, this was never compatible with providing tax benefits. Alternatively, they might arrange for an expensive intermediary like a notary (although technically that would not be fully anonymous, depending on the discretion of the notary).
 
 Technically guaranteed donation confidentiality is certainly non-trivial to implement in the digital payment era. What you donate to and why may be strictly personal, but due to the nature of the banking system along the financial pipeline there are an uncomfortable amount of actors handling sensitive data that allows for profiling and targeted discrimination on grounds. And there are even more that later on may have access to it. Digital payments are logged and made accessible to many different actors, and reporting donations to tax authories adds yet (at least) one more actor to the pipeline. It is the scope of this document to try and solve this issue and finally introduce donation confidentiality which adheres to 'privacy by design'.
 
 ### What this document is not
 
 This document is not in any way a overview of current legal requirements across the world on how taxation on donations work.  Taxation is predictably unpopular despite its clear essential function in how modern societies work, and therefore a very political topic that is subject to frequent change. Whether it is taxation on labour and profits, on property, on inheritance, on income from investment or gambling, or on consumption of products or services - there is no global universally agreed standard on whether these should be taxed and how that is to be done. Ad hoc regulation as part of political shifts makes taxation very context-specific and temporal. We are unaware of any attempt at creating such an overview as a public resource, and the cost of creating and subsequently maintaining such an effort would be inhibitive.
 
 Instead the focus of this document is on providing an overview of generic requirements that could be made to a donation flow in order to comply with regulation.
 
 One should note that in many legislations, recipients of donations do not necessarily have the same protections. Donations should be given without return consideration, but of course there are many financial transactions (such as gifts or donations from business or lobby groups to political parties) that are not as clean in this respect.
 
 
 ## Requirements
 
 The starting point of this document is to create an initial overview of requirements to provide donors with donation privacy and tax authorities with adequate proof that a donation was indeed clean and made according to the rules for donations in their region of operation.
 
 Tax authorities are creative, and taxation is an ever evolving area of complexity. We will therefore not claim to provide the definitive overview, but to provide a good start for bootstrapping a donation ecosystem in the full knowledge that this will need to be updated
 
 ### Assumptions
 
 The basic assumptions when defining requirements for a donation flow are as follows:
 
 - a donor donates from their **own assets**, and is willing to go on record (by means of a self-declaration) as acting on their own accord. Violation of this principle would then constitute fraud at their end.
 - a tax authority wants to assert that a donation comes from the legitimate donor, and is not made by some third party on their behalf
 - there is no inverse relationship between the donor and donee, where the donor stands to receive money back from the donee in some concrete (in)direct way as result of the donation.
 - donors are willing and able to provide privacy-preserving attestation of some unique and non-falsifiable personal or organisational property (such as a tax identification number) *at the time of donation* in order to be able to add up multiple donations within a single tax reporting period and validate that these don't pass beyond a threshold set by the tax authority or other regulators
 - we deal with philanthropies that are subject to *regulatory oversight*, *proper governance* and *regular audits*, so that money laundering is not relevant
 - it is acceptable for some third party to be involved, but only based on open source technology and on a zero knowledge basis
 - philanthropies are able to provide valid digital signatures
 
 A possible threat model should include donations to be used for laundering criminal assets. This does not mean that we expect charities themselves to play foul, but tax benefits that could be transfered to someone else would indirectly represent actual value (even commercially tradeable):  donations from someone paying lower tax rates could be used to artificially lower the income of a person paying a higher rate. The money going to the charity would essentially be used to trigger a laundered partial payout in the legitimate world.
 
 ### Design goals
 
 The following design goals hold:
 
 - the donor wishes to remain fully anonymous, also towards the organisation(s) donated to
 - the donor should be able to claim the tax benefits they are entitled to without having to disclose any of the organisation(s) donated to to the tax authority
 - the donor may accumulate any number of smaller or larger donations towards different eligible organisations (ideally even cross-border, in the presence of suitable fiscal arrangements such as within the European Union)
 - since donations are cumulative and often spontaneous, a donor should not have to decide upfront whether they will request tax benefits for their donations later on.
 - while at the same time, the wallet of a donor should offer plausible deniablity of donations
 - charities and tax authorities are willing and able to run basic infrastructure to achieve the above
 
 ### Capabilities
 
 The following capabilities are needed to enable a maximum fit with as many fiscal regimes as possible for both informal and regulated donations, while at the same time serving the interest of the donors in question in the best possible manner:
 
 - Provide fiscal statement
 - Proof of registration
 - Providing a configurable self-testimony from the donor that they comply with specific legislation or regulation related to donations
 - Cumulative donation counter from same donor to same cause
 - Providing a notarised affidavit asserting uniqueness
 - Unique ID for voting/Donor Advised Choices
 - Making a compound weighted donation
 - Cost transparency
 - Staged donation
 - Bandwidth donations
 - Codes of conduct
 - Restricted access mechanism
 
 We will elaborate on each of these capabilities below.
 
 #### Capability: Provide fiscal statement
 
 The ability to providing a fiscal statement from the donee linked to the donation is the starting point for most regulated donations, in order to comply to current practices.
 With a time-stamped and printable fiscal statement of the amount, digitally signed by the philanthropy, a donor can prove their donations in person to a tax authority.
 
 It should be possible to obtain this statement at the time of donation, and ideally within a reasonable period afterwards - in both cases without having to expose any additional information to anyone (such as an IP address which is typically visible when downloading a document via the web).
 
 There might be a need to include personal data/attributes in the attestion (e.g. a name, password ID, etc). There is no need for the charity itself to have any knowledge about such information, so it may be included encrypted with a key accessible exclusively to the donor/the tax authority/an auditor or other suitable independent third party.
 
 The information should be configurable, and it should be clear which information is somehow independently validated.
 
 #### Capability: Proof of registration
 
 In some countries (e.g. Belgium) donors are required to register themselves with the tax authority before making a donation. While we believe that to be an anti-feature, it should be possible to include a checksummed code provided by the tax authority or a philanthropy that makes sure that only registered donors can donate.
 
 #### Capability: Configurable pledge
 
 It may be necessary for the donor to testify (prior to the donation) that they comply with some legislative or regulatory requirement, or agree with a policy set by the philanthropy in question.
 
 As a generic requirement, this translates to a configurable pledge (e.g. "I am not an employee or grantee of the organisation I am donating to, and am acting on my own accord. I stand to make no direct financial gains from making this donation").
 
 The potential for abuse of donations to regulated charities is very limited. Such a self-testimony will allow the default to be to treat donations in a "good faith" manner rather than with a top-heavy and restrictive one-size-fits-all method.
 
 #### Capability: Cumulative donation counter from same donor to same cause
 
 One way to bypass restrictions in terms of allowed donation sizes before "Know Your Donor" requirements kick in, is to split donations up. It is therefore necessary to be able to assert that cumulative donations from a donor stay below a periodical threshold.
 
 #### Capability: Notarized affidavit
 
 More generically, for instance when there is a minimum age for donations to certain class of causes, a privacy-preserving solution might be to have a notarized affidavit independently asserting the requirements have been met to be included in the metadata of the payment.
 
 Such an affidavit is likely to contain a unique uuid which is not traceable back to any underlying private information of the donor or to the philanthropy in question, plus a counter or append-only record, and a date stamp with an accuracy no higher than a calendar week (to avoid correlation attacks).
 
 It is better for this affidavit not to be provided by individual philanthropies but by trusted third parties otherwise ignorant of the transactions in questions: it involves an isolated task which can easily be outsourced to an independent service. That independent service only needs to perform this singular task based on having access to the proof/attribute(s) in question, does not need to have any further knowledge of any of the actors.
 
 As long as the affidavit is non-falsifiable and irrevocable, it should suffice to assert uniqueness and allow to prove that the required conditions were met.
 
 #### Capability: Unique ID for donor advised decisions
 
 Also from the side of a donor, there might be a need for having a unique ID for voting. In the same vein as Donor Advised Funds, a crowd-sourced version could be Donor Advised Choices where donors can vote on specific options ("Shall we prioritize stretch goal A or B", or "We see a new opportunity, is it okay to replace some stated work with something else") - either on a weighted variant (larger donation gives more weight) or on a one person, one vote (all unique donors get the same vote).
 
 Alternatively, a preference vote encoded inside the payment (based on e.g. Condorset voting) could provide a one-time donor advised voting mechanism.
 
 #### Capability: Compound weighted donation
 
 The general idea is that donors can make a single donation, but this exists of multiple payments to multiple recipients. This is particularly relevant for informal donations to the developers of free and open source projects that do not make use of a fiscal host. In such a situation, the donations may be divided across the individual developers with a certain weight. Each of the recipients receives a direct donation from the donor, which typically will be far below the threshold for taxation.
 
 There can be a suggested/default weight, but the donor should be able to tweak the relative weights and/or block specific recipients.
 
 #### Capability: Cost transparency
 
 It should be easy and transarent to the donor what percentage of their donation is actually used for the effort for which funds are being raised. In particular it should be possible for the **cost for fundraising** to be made explicit, especially if this involves third parties. It should be possible to choose to donate without paying for fundraising.
 
 (This might use the features from compound weighted donation)
 
 #### Capability:  Staged donation
 
 This is a feature that works along the lines of so called smart contracts. As goals are incrementally met by the project, donations are made. If the goals are not met according to the preset stages, the part of the money that is concerned with work that is not delivered is not paid and ultimately restored to its rightful owner - the donor.
 
 #### Capability: Bandwidth donations
 
 When people are pooling together resources to make some goal possible, in order to stimulate the broadest possible donations, the amount donated can be made flexible (within a certain **donation bandwidth**). Instead of stretching goals (which donors might not agree with) and promoting freeloading, the size of individual donations could shrink as well. This would stimulate to share the collective load.
 
 #### Capability: Code of conduct
 
 Donors transfer part of their (sometimes scarce) eartly possessions to support the good work of a cause they believe in, and it is only logical that this altruism comes with certain expectations in terms of how the organisation receiving that money will subsequently spend it.
 
 A **Code of Conduct** is the equivalent of the product warranty, where philanthropies declare themselves accountable and promise to uphold certain best practices and adhere to public scrutiny - and are subsequently held to their promise by stakeholder organisations like Donateursbelangen.
 
 An example of such a Code of Conduct public benefit organisations can subscribe to is the [Donor Pledge](https://www.donateursbelangen.nl/de-donateursbelofte) ("Donateursbelofte"). It should be possible to adhere to multiple such Code of Conducts.
 
 Similarly, there are certification schemes for public benefit organisations. These offer a reverse link from the certifying organisation to the philanthropy. It should be possible to include the certification conditions and this reverse link alongside the payment.
 
 #### Capability: Restricted access mechanism
 
 In order to engage donors with the work being done, philanthropies might want to give 'behind the scenes' access to ongoing work to their donors. In order for that to happen, it should be possible to provide (limited) access to restricted materials. For instance this could be handing out *One Time Passwords* or other forms of proof of donation that will allow donors to get access to restricted areas.
 
 #### Capability: Unlock thank you artwork
 
 Making a donation is not just a clinical financial transaction where money is transfered from A to B, but something that also has emotional weight: the donor has taken a step they may have pondered about for a long time.. Celebrating this altruistic win is part of the donation experience. Thank you artwork consists of images, video and/or audio used to enliven the financial transaction.
 
 In some cases artists or other creatives might donate a work to the philanthropy in question for this purpose, in other cases a charity might use photos of their day to day work.
 
 #### Capability: Donation matching with a reference
 
 In some cases, a benefactor will want to incentivise others contemplating a donation to a specific good cause to go ahead. That is not necessarily something that needs privacy: some people and organisations use donations to publicly profile themselves. A common mechanism to incentivise others is to promise to match their donations to the organisation in question, which is frequently done by announcing a period in which other peoples donations will be "matched" (as in: donor A promises to donate as much as donors B and C combined).
 
 However, this is obviously a very crude mechanism, only suitable for benefactors with very deep pockets. It also doesn't  give much opportunity for the benefactor to explain why they do this (and, let's be realistic, get some PR out of it as well).
 
 By allowing the donor to include a reference to e.g. a social media post or blog post announcing the matching, the donor can 'see' that they are being heard/are getting PR mileage out of their donation.
 
 #### Capability: Donation matching with a reference
 
 Quite a few large employers do donation matching as part of their corporate responsibility or HRM efforts. This is typically not tied to a single cause. Many larger employers sponsor such matching gift programs, either by themselves (such as the U.S. Office of Personnel Management's [Give CFC](https://givecfc.org)) or via (expensive) third party organisations such as Benevity, Submittable, WeSpire, Goodera, etc.
 
 In many cases, this practice is rather privacy-invasive. If you donate to e.g. a reproductive rights organisation, an NGO promoting climate justice or a digital rights organisation, an employer might have some opinion about this. It would be better if this could be done via GNU Taler. This would require a mechanism similar to DONAU where charities could prove to an employer that some eligible person (typically an employee or retiree) has donated money which needs to be doubled - obvously, without disclosing anything else.
 
 ## General background information
 
 This chapter contains general background information pertaining donations.
 
 ### General Regulatory Framework
 
 European Union (EU) member states regulate donations through a blend of EU-wide directives and country-specific laws. While there isn’t a uniform regulation that applies to all donations in Europe, certain EU directives and principles affect donation practices, particularly those related to transparency, anti-money laundering (AML), tax compliance, and donor data protection.
 
 ### Transparency and Accountability
 
 Transparency in charitable donations is crucial to maintain public trust and deter financial misuse. European countries typically require organizations that receive donations to adhere to transparency measures, including:
 
    - **Public Financial Reporting:** Most European countries mandate that charities, nonprofits, and similar organizations publish annual financial reports. These reports generally include detailed breakdowns of income sources, donation amounts, and expenditures.
    - **Disclosures for Large Donations:** In some countries, large donations must be reported to regulatory authorities. This threshold and the specific requirements vary by country. For example, Germany requires registration for organizations receiving public donations, while the UK mandates certain reporting for donations above a particular threshold.
    - **Third-Party Audit Requirements:** To verify the financial integrity of charitable organizations, many countries mandate independent audits for organizations surpassing specific revenue thresholds.
 
 ### Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF)
 Given the potential for abuse of charitable donations for money laundering and financing illegal activities, EU-wide Anti-Money Laundering Directives (such as the AMLD5) require organizations to implement stringent controls.
 
    - **Know Your Donor (KYD):** Similar to the Know Your Customer (KYC) practices in the financial sector, some countries require organizations to verify the identity of donors making significant contributions. This requirement is typically tied to AML laws.
    - **Transaction Monitoring and Reporting:** Charitable organizations must monitor donation transactions and report any suspicious activities to relevant national authorities.
    - **Registration with Financial Intelligence Units (FIUs):** Nonprofits are encouraged, and sometimes required, to register with FIUs in certain EU countries to facilitate AML compliance.
 
 ### Taxation and Deductibility
 
 The tax treatment of donations varies across Europe, but many countries provide tax incentives to encourage charitable giving. Donations to qualifying nonprofit organizations are often tax-deductible, either partially or fully, depending on local laws.
 
    - **Eligibility of Donors and Organizations:** Both the donor and the recipient organization usually need to meet specific criteria. For instance, donations to accredited charities registered with national authorities are often eligible for tax relief.
    - **Limits on Deductions:** Most countries place caps on deductible donations, typically as a percentage of the donor’s income. For example, France allows deductions up to 20% of taxable income, whereas Germany permits deductions up to 20% of annual income or corporate profits.
    - **Cross-Border Donations and Tax Relief:** The EU's "Stauffer doctrine" principle requires member states to treat cross-border donations similarly to domestic donations if the recipient organization meets equivalent standards, which facilitates cross-border charitable giving across the EU.
 
 ### Data Protection and Privacy (GDPR)
 
 The General Data Protection Regulation (GDPR) is a significant EU law that affects how personal data is collected, stored, and managed, including for donations.
 
    - **Consent for Data Collection:** Donors must be informed of how their personal data will be used, and organizations must obtain explicit consent if data will be used for purposes beyond the donation transaction itself, such as marketing.
    - **Data Minimization and Retention:** Organizations are expected to collect only the data necessary for processing the donation, retain it only as long as necessary, and ensure proper data deletion practices.
    - **Right to Access and Erasure:** Donors have the right to request access to their personal data held by an organization and can request deletion of their data under specific circumstances.
 
 ### Corporate Donations and Sponsorships
 Corporate donations are also regulated, particularly when related to tax deductibility, disclosures, and compliance requirements.
 
    - **Transparency in Corporate Sponsorships:** European countries may require public disclosure of corporate donations or sponsorship arrangements, especially when public funds are involved. Many countries also enforce rules against donations that may appear to be intended for influencing legislation or government actions.
    - **Limits on Corporate Donations:** Some countries impose caps on corporate donations eligible for tax relief to prevent excessive deductions and potential misuse.
 
 ### Cross-Border Giving and EU Philanthropy Initiatives
 The European Union encourages philanthropy across borders within Europe, but the process is still complex due to varying national tax and legal frameworks.
 
    - **European Foundation Statute and the European Philanthropy Manifesto:** These initiatives aim to harmonize cross-border philanthropy regulations. The proposed European Foundation Statute, for instance, would create a legal form of a foundation operating across the EU.
    - **Transnational Requirements for Nonprofits:** Nonprofits must navigate both the tax and regulatory requirements of each country in which they operate or fundraise, including any special registrations, tax filings, or documentation for cross-border transactions.
 
 ### Ethical Standards and Codes of Conduct
 
 Some European countries have established or encouraged adoption of ethical standards or codes of conduct for fundraising activities. Examples include:
 
    - **Code of Conduct for Fundraising:** Many countries have adopted codes of conduct, which may govern methods for soliciting donations, advertising practices, and donor interaction protocols. There are also private initiatives such as the Donor Pledge from the Dutch foundation Donateursbelangen ("Donor Interest Foundation").
    - **Charity Commissions and Regulatory Bodies:** Several European countries have independent regulatory bodies that oversee charitable organizations, such as the Charity Commission in the UK, to ensure compliance and ethical conduct in donations.
 
 ### Country-Specific Considerations
 
 While EU-wide directives provide a framework, each country has unique laws. Here are a few examples:
 
    - **Germany:** Nonprofit organizations must register with local authorities to receive tax exemptions, and donations exceeding €10,000 must be reported.
    - **France:** Nonprofits must adhere to the "Loi de 1901" and comply with annual reporting requirements to remain eligible for public donations.
    - **Italy:** Nonprofits are eligible for tax incentives if they register as ONLUS (Organizzazione Non Lucrativa di Utilità Sociale) or a similar designation under Italian law.
 
 ### Conclusion
 
 Navigating donation regulations in Europe involves adhering to EU directives on transparency, AML, tax compliance, and data protection while also meeting specific requirements in individual countries. Compliance ensures trust in the philanthropic sector, promoting ethical giving practices and cross-border donations within the EU’s regulatory landscape.
 
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