Week in Insights: Religious Tax Exemptions Are Hard to Get Right

Exempting religious institutions from taxation may seem like a no-brainer. If a church or charitable organization is feeding the hungry, taxing that work starts to look like bureaucratic parasitism. Even in the best-case scenario, the revenue raised goes back into similar state-run services, minus overhead costs.

The problem is that the moment any government makes religion tax-exempt, it must define what counts as a religion, how sincere an enterprise really is, and how spiritual an endeavor can be. This process invites overreach by the state or abuse by opportunists.

Take Japan, where tax-exempt religious corporations are increasingly being “sold”—that is, transferred between an outcoming and incoming head priest with timing that coincides with cash “donations.” The seller is a retiring priest; the buyer often is an entrepreneur interested in tax-exempt real estate or columbarium profits.

Such exploitation is the natural result of laws that grants benefits based on religious character without a clear method, or enduring appetite, to measure it. Japan’s government has issued guidance, implemented oversight, and empowered authorities to dissolve inactive religious organizations that are ripe for abuse—but enforcement remains sporadic absent enough legal clarity.

This isn’t an isolated scandal or temporary policy issue. Just look at the US Supreme Court, which unanimously sided with Catholic Charities Bureau earlier this month in a dispute over Wisconsin’s unemployment tax exemptions. The state had argued that the organization wasn’t religious enough to claim the exemption. The court disagreed, contending that the courtroom is no place to parse religion—while doing just that.

The longer a tax exemption list is, the more the potential for mismanagement expands. In Japan, the abuse was more transparent than usual. But wherever the tax code benefits the pulpit, we shouldn’t be surprised when religious activity starts to look transactional.

—Andrew Leahey

Visitors offer prayers on the first business day of the year at the Kanda Myojin shrine in Tokyo.

Photographer: Kiyoshi Ota/Bloomberg via Getty Images

Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts examined a proposed tax on litigation financing, the Senate’s passage of stablecoin legislation, and more.

The Exchange—It’s where great ideas on tax and accounting intersect.

Insights

Hospitals Face a Legal Land Grab Under the ‘Big Beautiful Bill’

Johns Hopkins’ Stacey Lee says hospital boards can navigate Congress’ reconciliation bill’s legal quandaries by eliminating tax exposure but still boosting hospitals’ missions and retention.

Stablecoin Breakthrough Will Add to Tax and Accounting Burdens

Lehman College’s Sean Stein Smith says tax professionals must address the potential uptick in tax reporting complexities after the GENIUS Act’s passage in the Senate.

Digital Platforms in Vietnam Must React to Tax Challenges Fast

Foreign digital platforms need to work rapidly and effectively with the government to meet their new withholding tax reporting obligations in Vietnam, say experts from BMVN International and Baker McKenzie Vietnam.

A Changed IRS May Finally End Conservation Easement Legal Mess

Crowell attorneys examine the surge of syndicated conservation easement lawsuits against the IRS and offer tips for determining whether to pursue such litigation.

EU Court Ruling Improves Efficiency for Multinational Importers

Grant Thornton’s Aiki Kuldkepp explains how the court’s ruling on pricing arrangements offers greater certainty for importers to the EU and reinforces the need for them to engage early with customs authorities.

IRS ‘Safe Harbor’ Guidance Offers Corporations Compliance Relief

Forvis Mazars’ Scott Austin, Joshua Kamman, and Howard Wagner explain how new rules form the IRS reduced compliance burdens for corporate taxpayers affected by alternative minimum tax rules.

New Transfer Pricing Scrutiny Requires Transactional Resilience

Exactera’s Mili Diaz Colodrero explains how multinationals can build financial transaction frameworks that comply with increasingly strict transfer pricing requirements.

Litigation Finance Tax Closes Loopholes for Exploiting Investors

US Chamber of Commerce Institute for Legal Reform President Stephen Waguespack writes that a tax on litigation funding is a commonsense way to curb third-party interference in the justice system.

Columnist Corner

Technically Speaking design by Jonathan Hurtarte/Bloomberg Tax

A proposed 40.8% tax on litigation finance profits would simply make lawsuits more expensive rather than stopping financing or deterring foreign investment in US litigation, Andrew Leahey argues in his latest Technically Speaking column.

Expanding mandatory disclosure of litigation funding arrangements would be more effective, Andrew says, adding that “it seems the bill’s backers want to look tough on foreign meddling and plaintiff excess, but their policy resolves neither.” Read More

News Roundup

Treasury Deal Kills ‘Revenge Tax’ That Spooked Wall Street

The Treasury Department announced a deal with G-7 allies that will exclude US companies from some taxes imposed by other countries in exchange for removing the Section 899 “revenge tax” proposal from President Donald Trump’s tax bill.

IRS to Lose 22% of Taxpayer Service Workers After Trump Purge

The IRS should quickly hire thousands of new taxpayer service employees so it’s prepared for next year’s filing season, given the agency is losing more than one-fifth of those workers under Trump administration-directed cuts, the National Taxpayer Advocate said in her mid-year report.

Trump’s Treasury Tax Policy Pick Wins Senate Confirmation

Ken Kies, President Donald Trump’s pick to be the top tax policy official at the Treasury Department, won the approval of the Senate Thursday.

Netflix, Sony Win California Tax Credits for Film Productions

Netflix and Sony are the biggest winners among film companies getting a total of $96.3 million for 48 projects in the latest round of California income tax credit awards, the California Film Commission and Gov. Gavin Newsom (D) announced on Monday.

Tax Management International Journal

“Materiality” Limits Service Deductions in Mexico: Key Takeaways

Multinationals with Mexican subsidiaries should review recent guidance on documenting the “materiality” of service expenses and consider using advance pricing agreements to avoid uncertainty, say KPMG practitioners.

Career Moves

Andrew Krause and John Paul Bratcher joined Taft Stettinius & Hollister as partners in its private client practice in its new office in Naples, Fla.

Menachem Danishefsky joined Weil, Gotshal & Manges as a partner in its tax department in New York.

Sarah Bowman joined Perkins Coie as a partner in its private client services practice in Seattle.

Dinis Tracana was promoted to a partner at PLMJ in its tax practice.

If you’re changing jobs or being promoted, send your submission to TaxMoves@bloombergindustry.com for consideration.