One way of supporting circular economy in the commerce sector is to encourage businesses to donate to charity all the clothes and shoes in good condition that are either left unsold or that were used for display purposes. The commerce sector is very committed to combating climate change and environmental considerations in business. Legislation should be as simple as possible in order to reach environmental goals and support circular economy. However, the current taxation creates a financial threshold for donations.
“Currently a business must pay value added tax for donations of clothes and shoes according to the normal rate of 24 per cent. It is obvious this does not encourage businesses to donate to charity,” says Toni Jääskeläinen, tax specialist of the Finnish Commerce Federation.
“The current legislation guides businesses to the wrong direction when, for example, destroying clothes and shoes causes no tax repercussions,” Jääskeläinen compares.
According to Jääskeläinen, the tax exemption for donations of clothes could be implemented in two different ways in Finland: either by specifying the interpretation of the Value Added Tax Act or by amending the law.
Interpretation of the law could be specified by having the Tax Authority consider as zero or negative the value of clothes and shoes that are left unsold or used for display purposes – as it is in practice to the business. This way there would be no value added tax to be paid for a donation and the business would assess what the value of the clothes and shoes is at the time of donation.
“The business itself is the best expert in assessing if a product has practical value or not. The value of a piece of clothing becomes negative when its sole function is to take up storage space – in the worst case scenario from expensive central locations,” says Jääskeläinen.
The other option is to add to the Value Added Tax Act a stipulation that taking goods into own use is not taxable if the undertaking is donating the goods to charity.
Current tax revenue small
“The changes to Finnish tax revenue would be cosmetic,” says Jääskeläinen. Currently, almost no tax revenue is generated because paid donating is not appealing to businesses.
“Currently donating clothes and shoes happens at a very small scale in the commerce sector,” confirms Veli-Matti Kankaanpää, Managing Director of the Fashion and Sports Commerce association.
About 184 million pieces of clothing and 19 million pairs of shoes are sold annually in Finland. According to Kankaanpää, the donation potential is under half a per cent of this, meaning 30,000–300,000 pieces of clothing and roughly 50,000 pairs of shoes. The estimate is based on a survey conducted for the member companies of the Fashion and Sports Commerce association.
According to Kankaanpää, the products to be donated would mostly comprise display pieces and sales lines that never got to consumer sales in the first place. A smaller portion would be goods left unsold in retail trade.
“It is obvious that companies aim to have zero waste, but as donation potential is generated, for various reasons, the most responsible solution would be inexpensive and easy donations,” says Kankaanpää.
Seamless practices direct businesses to be responsible
The practice regarding the value added tax of donation varies per EU country – although some countries that allow tax free donations have set the threshold infeasibly high for business with administrative reporting obligations.
Jääskeläinen emphasizes that Finland should avoid this mistake and, if implemented, tax free donating should be easy in all regards to get companies in the commerce sector to engage.
“Donating products would be the easiest way for operators in the commerce sector to act more responsibly when products become unnecessary for them. A donation that is small for a company could be very useful to the recipient if products in good condition would be channeled to those in need via charitable organisations.
Toni Jääskeläinen, tax specialist, Finnish Commerce Federation, tel. +358 (0)50 533 0619, toni.jaaskelainen(at)kauppa.fi
Veli-Matti Kankaanpää, Managing Director, Fashion and Sports Commerce association, tel. +358 (0)50 533 0619, velimatti.kankaanpaa(at)muotijaurheilukauppa.fi
The Finnish Commerce Federation represents commerce – the largest sector of economic life. Commerce employs around 300,000 people in Finland. The Federation has around 7,000 member companies and it represents both retail and wholesale commerce in industry policy and labour market lobbying. www.kauppa.fi
The Fashion and Sports Commerce Association represents clothes, sporting goods and shoe trade. Its members are fashion and sporting goods chains, department store and markets as well as suppliers www.muotijaurheilukauppa.fi The Fashion and Sports Commerce Association is a member of the Finnish Commerce Federation.