by Ali Naeem
Although the culture of pro bono services is not well established and promoted in the Maldives, an increasing number of lawyers now seem to espouse the view that it is their professional responsibility to provide legal services to persons who lack the financial capacity to procure their services. In order to support this change of mindset, a proper legal aid mechanism and a pro bono culture are much needed. Many experts in this area recommend that a statute must regulate compulsory pro bono legal service1 if a system with pro bono legal services is to work properly in the Maldives.
In this blog post, I will explore the current tax position on providing pro bono legal services as the understanding of this may be critical for the practising lawyers, as well as for stakeholders that are considering regulating compulsory pro bono legal services.
The term “pro bono” is used within the legal profession to refer to the provision of legal services to persons of limited means on a free or significantly reduced fee basis, with no expectation of a commercial return. It also involves the delivery of legal services or the provision of training on the same basis to charitable, civic and other community organisations in matters designed to address the needs of persons of limited means2.
GST is an indirect tax imposed on the recipient of services although the collection, payment and reporting obligations are on the service providers, referred to as registered persons in the GST Act. On the other hand, Income Tax is a direct tax on the net income of an individual or a business and is based on the taxable income earned by that person.
Goods and Services Tax
The GST Act generally requires persons, including legal service providers, to register for GST if the value of their supplies exceeds MVR 1 million within a year5. As such, lawyers or law firms that reach this registration threshold will have to register and collect GST at 6%, generally, on all services provided to their clients6. This applies irrespective of a substantially reduced fee offered to a person with limited means.
No Consideration, No GST?
GST is generally payable on taxable supplies and is based on the consideration received. This proposition is supported by the way the GST Act defines the “value of supply” for the purpose of calculating tax on the supply. Section 19(a) of the GST Act reads as follows:
“Where the consideration for the good sold or service supplied is in money, the value of that good or service shall be such amount as, with the addition of the tax charged, is equal to the amount of the money”
The rest of the subsections of Section 19 of the GST Act also suggest that consideration constitutes an important constant of the formula that determines the value of supply, based on which the amount of GST to be charged is derived.
So does it mean no GST on complimentary services?
The GST Act specifically provides for the treatment of GST on services that are provided free or on a complimentary basis. The general approach here is that you may need to account for GST even on services that are provided free or on a complimentary basis, if they are (1) provided to related parties, (2) not for “business purpose”.
Services provided to related parties are taxable at their market value. The idea is that a related party should not be in a better position in terms of tax, compared to a non-related party as both parties consumed taxable services. However, the main focus of this blog is not on related party transactions so I do not intend to go into the details of this any further.
Section 54 of the GST Regulations specifically set out rules on accounting for GST on services that are provided free of charge. Section 54(a) provides three broad heads under which tax should not be charged for supplies made free of charge. Looking at the ‘exemptions’ given under this section, it is clear that the supply of legal services free of charge does not fall within the ambit of any of those heads. Thus, it is clear that the GST Regulations do not provide for a mechanism to address the very unique nature of pro bono7 services, especially since the exception to pro bono services are not carved out of the general rule that requires GST to be charged on free supplies. So, if ‘no consideration, no GST’ argument is valid, all pro bono assignments must be valued at open market value and GST must be accounted for at such value.
I must, therefore, admit that the ‘no consideration, no GST argument is not without its limitations. However, given the very distinct nature of pro bono legal services, I am inclined towards the view that GST should not be levied on the supply if no fees are payable in connection with that supply. Accordingly, if the pro bono legal work is done on a reduced fee, GST must be applied on the fees actually payable, not on the market value of the services. The same position is mirrored in the EU Council’s Directive on the common system of value added tax 2006/112/EC8.
Conversely, one may make the inference from several sections of the GST Act and Regulations as well as the practices of the MIRA that we must go beyond Section 19(a) of the GST Act before making any conclusion on this, especially given the rules on determination of GST on complimentary supplies, and the requirements on imputing open market value on certain transactions and the MIRA’s (self-induced) authority” to assess tax on transactions between unrelated parties. Some European countries like Ukraine9 have adopted this approach by requiring registered VAT taxpayers to account for legal services provided free of charge.
Can section 30 of Regulation cause trouble?
Although I consider Section 30 of the GST Regulation to be ultra-vires10, it ‘allows’ the MIRA to assess tax on supplies made to unrelated parties where it believes the value of supply [legal fees] is lower [free] than the open market value – similar to the manner the tax is to be accounted for on supplies to related parties. This, in the context of pro bono legal services, means the lawyers providing legal services to an unrelated party may also have to account for GST at the imputed market value of that service, even if the parties are unrelated.
Claiming input tax in connection with pro bono services
Again as a general rule, Section 43(d) of the GST Act allows taxpayers to deduct input tax in relation to supply from a registered person. Section 44 of the Act goes on to limit the circumstances where input tax cannot be claimed. It states that input tax cannot be claimed in relation to a supply for which output tax has not been accounted for. This means, if you have not accounted for output tax in relation to a service, then you should not claim any input tax corresponding to that service. A very relevant example would be travelling costs for which you may incur input tax with respect to a pro bono legal service.
Hence, where the proposition that GST is required to be charged on pro bono services holds true under Section 54(b), then, input tax relating to that supply should be able to be claimed.
GST on disbursements
Although lawyers may not charge a fee on cases handled on a pro bono basis, lawyers often invoice their clients for the disbursement of expenses. Section 39 of the GST Act requires you to account for GST on disbursements if that supply is in itself a taxable supply.
The specific rules on taxability of disbursements are explained in Tax Ruling G811 and the key question when determining whether one needs to account for GST on that disbursement is whether the agent [the lawyer] of the principal [the client] is legally liable to make the payment for that supply. For example, if you recharge the cost of a speed boat ticket that you buy to visit a client you must charge GST on it because the speed boat was for you, not for the client.
Although the rule may seem simple, this is often an area of exposure for law firms, especially when providing services on a pro bono basis. Although we don’t have any case law on this very subject yet, this is a highly contentious area in many other jurisdictions12.
The Income Tax Act does not specifically require you to impute services provided to unrelated parties at open market value or under any other mechanism. Thus, any service rendered free of charge or at reduced fee should not generally attract any tax implications unless the recipient of services can be considered a related party, in which case the arm’s length principles must be applied.
Claiming expenses related to pro bono services
Section 17 of the Income Tax Act sets out the general rule on deducting expenses when calculating a person’s taxable income: the wholly and exclusively test. As to the question whether an expense (for example travelling and print costs associated with a pro bono assignment) incurred in relation to the provision of pro bono legal service can be deducted when calculating the service provider’s taxable income depends on whether the expense will satisfy the said test- that is whether it is incurred wholly and exclusively for the production of an income. One may argue that such expenses do not satisfy the test as the assignment itself is not intended to generate any income.
The issue of deductibility would especially arise where pro bono work constitutes a significant proportion of all work done by a firm or a lawyer. Under such circumstances, the tax authority may take the position that the expense is in connection with an activity that has a non-income producing objective and may associate such with a private desire to help the community.
While the tax laws, including Income Tax Act, do not specifically recognise the distinctive nature of pro bono services offered by lawyers, I am of the view that the law should be interpreted in favour of pro bono lawyers unless a wrong motive can clearly be established. I am inclined to argue for the case that it is an inherent part of the practice of lawyers that certain assignments need to be done on a pro bono basis, and hence a deduction must be allowed despite the assignment in itself not producing an income to the lawyer or the law firm.
Is it right to impose tax on pro bono services?
The right to a lawyer is a fundamental right enshrined in the Constitution of the Maldives13 and they are a vital conduit through which citizens gain access to courts and the law. The role that lawyers play has often been given constitutional status.
It is a general understanding that any administrative hurdle, imposition of a tax or fee should not interfere, impede or deny access to justice. Proponents that support removal of any fees related to justice argue that tax is an obstacle to get justice for members of the public on low income as it increases the cost of services. This was the position of the prominent petitioner, Dugald E. Christie, had taken at the lower courts in the Canadian landmark case14, contending that imposing taxes on legal services is an obstacle to access to justice. Mr Christie proposed that the tax constituted a tax on justice contrary to Magna Carta and Rule of Law15.
As mentioned earlier, the current tax laws do not recognise the concept of pro bono legal services and hence the exposure of law firms and lawyers providing pro bono legal services is considerable with respect to issues such as disbursements and deduction of expenses. I cannot emphasise enough on the importance for lawyers to be armed with proper documents and cost agreements to show tax auditors the true nature of the pro bono transactions.
The Maldivian authorities may also consider exempting GST on pro bono legal services and if not on all, apply it on specific legal services such as domestic violence or family mediations as adopted by countries like Belgium16. Even if it is decided that the issue of taxing pro bono legal services is unconnected to the constitutional rights, the authorities, at the very least, shall consider exempting provision of pro bono legal services from GST as is practised in countries like Australia17, by changing the applicable laws18.
1 UNDP, ‘Options for Legal Aid Programming in the Maldives’ (Working Paper Series 1, 7 August 2014) <https://www.mv.undp.org/content/maldives/en/home/library/democratic_governance/ResearchPaper.html> accessed 25 July 2020.
2 Supreme Court of Illinois, Amended Rule 756 of Supreme Court of Illinois, <https://courts.illinois.gov/SupremeCourt/Announce/2018/052518-3.pdf> accessed 20 September 2020.
3 Imposed under the Goods and Services Tax Act (Law Number 10/2011).
4 Imposed under the Income Tax Act (Law Number 25/2019).
5 There are a number of criteria for registration set out in Section 51 of the GST Act (n 3).
6 Unless the service can be considered an export of service in accordance with Section 22 of the GST Act (n 3).
7 I maintain that pro bono legal services are unique for the very fact that access to a lawyer, equality before the law and right to a fair trial are rights recognised as a basic human right, both in 2008 Constitution and in international human rights law and provision of pro bono legal services is the mechanism that facilitates those rights to those that are deprived of those rights by default as a result of their inability to pay for legal services.
8 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax  OJ L347/1. See Parliamentary Questions, Answers given by Mr Šemeta on behalf of the Commission (European Parliament, 2 August 2010) <https://www.europarl.europa.eu/sides/getAllAnswers.do?reference=E-2010-4592&language=EN> (accessed 25 September 2020).
9 Law of Ukraine On The Value Added Tax (No 168/97-VR) <https://www.wto.org/english/thewto_e/acc_e/ukr_e/WTACCUKR143A5_LEG_1.pdf> (accessed 25 September 2020).
10 The reasons I hold this view are many but I do not intend to go into detail of these as the topic itself must be explored as a separate issue.
11 Ruling Number TR-2012/G8 (accessible at https://www.mira.gov.mv/TaxLegislation/Tax%20Ruling%202012-G8%20(English).pdf).
12 See British Airways Plc v Prosser  EWCA Civ 547 that takes a very narrow view of the disbursements.
13 Article 53 of the Constitution of the Republic of Maldives.
14  1 SCR 873.
15 Note that the judgment of the lower courts was however overturned by the Supreme Court of Canada.
16 BDO Belgium, ‘VAT Administration Clarifies New VAT Rules For Lawyers’ (24 November 2013) <https://www.bdo.be/en-gb/news/2013/vat-administration-clarifies-new-vat-rules-for-law> (accessed 25 September 2020).
17 The Law Society of New South Wales,’ Cost Guide’(7th edn, Chapter 5 Goods and Services Tax ) <https://www.lawsociety.com.au/sites/default/files/2018-03/Ch%205.pdf> (accessed 25 September 2020)
18 I am of the view this must be done by amending the GST Act (n 3).