That’s Entertainment

Harold Tan provides some guidance on deductibility of entertainment expenses

 

This article provides an overview of how entertainment expenses are being treated for tax purposes.

 

 

GENERAL RULE OF DEDUCTIBILITY

As a general rule under section 33(1) of the Income Tax Act 1967 (“Act”), an expense that is wholly and exclusively incurred in the production of gross income is allowable as a deduction against gross income when computing one's taxable income.

 

An expense incurred of a private nature that has nothing to do with the production of income is not tax deductible. The issue of whether an expense is wholly and exclusively incurred to produce income is a question of fact to be determined on a case by case basis. Various factors such as the taxpayer’s source of income, the purpose of the expenditure, the proximity of the expenditure and income and how the expense is being treated in the account, are relevant considerations.

 

 

SPECIAL PROVISIONS FOR ENTERTAINMENT EXPENSES

Expenses incurred in the provision of entertainment are given special treatment for tax purposes with effect from 1 January 1988.

 

Entertainment is defined very broadly in the Act. It includes:-

 

  • the provision of food, drink, recreation or hospitality of any kind; or
  • the provision of accommodation or travel in connection with, or to facilitate, any of the above items.

 

Pursuant to section 39(1) of the Act, an entertainment expense is only allowed a 50% deduction against gross income, except in circumstances where the expenditure falls within any of the provisos to section 39(1). This includes any amount paid to an employee by the taxpayer to reimburse the employee for expenses incurred in the provision of entertainment.

 

 

FULLY DEDUCTIBLE ENTERTAINMENT EXPENSES

At present, there are 8 categories of entertainment expenses that are fully deductible.

 

 

(1) Entertainment provided to employees

The Act provides that the provision of entertainment such as food, drink and recreation to employees are fully deductible, except where such expenditure is incidental to the provision of entertainment for others.

 

For example, if a company organises an annual dinner for its employees, the cost of the dinner is 100% deductible even if the company invites some of its suppliers to the dinner because the entertainment to the suppliers is only incidental to the provision of entertainment to the employees.

 

 

(2) Entertainment business

A taxpayer whose business consists of providing entertainment to paying customers, such as a restaurant or cinema, is allowed a full deduction of the costs of providing that entertainment in the ordinary course of business.

 

This exception also applies where the provision of entertainment for payment forms only a part of the taxpayer’s business. For example, an airline which serves meals to its passengers can claim full deduction for the costs of providing the meals although the airline’s core business is in providing air travel.

 

 

(3) Promotional gifts at trade fairs outside Malaysia

Expenditure incurred in the provision of promotional gifts at trade fairs, trade exhibitions or industrial exhibitions held outside Malaysia for the purpose of promoting exports from Malaysia are fully deductible.

 

For example, the costs incurred by a company in giving out souvenirs and holiday tickets to visitors at trade fairs are fully deductible provided that the fairs are held outside Malaysia.

 

 

(4) Promotional samples

The costs of providing promotional samples of the taxpayer’s products are also 100% deductible.

 

Examples include the provision of free samples to guests at the launching of a new product, and the giving away of health drink samples to school children.

 

 

(5) Cultural and sporting events

The Act further provides that expenditure incurred in the provision of entertainment for cultural or sporting events which are open to members of the public for the purpose of promoting the business are 100% deductible.

 

To qualify for full deduction, the cultural or sporting event must be open to the general public. Entertainment expense incurred in cultural or sporting events which are provided to special classes of persons such as customers, suppliers, associates or journalists are not considered open to the public.

 

The Inland Revenue Board (“IRB”) by its Public Ruling No. 3/2008 issued on 22 October 2008 ("PR 3/2008") took the stand that the National Day Parade is not considered a cultural event.

 

 

(6) Promotional gifts within Malaysia with logo of the business

Expenses incurred in the provision of promotional gifts within Malaysia consisting of articles incorporating a conspicuous advertisement or logo of a business is fully deductible. Such promotional gifts need not be the product of the business as long as the business logo is affixed on those articles.

 

The IRB has taken the view under PR 3/2008 that in order to qualify for full deduction, the promotional gifts even if they bear the business logo should be given to the public on a non-discriminatory basis. As such, expensive gifts to selected persons would not qualify for full deduction.

 

 

(7) Entertainment related wholly to sales

The costs incurred in the provision of entertainment which are related wholly to sales arising from the business of the taxpayer are 100% deductible.

 

The fine line between an entertainment expense which is related wholly to sales, and one which is not, can in many situations be difficult to draw. In PR 3/2008, the IRB took the position that the phrase “entertainment related wholly to sales” means entertainment which is directly related to sales provided to customers, dealers and distributors but excludes entertainment provided to suppliers.

 

Further, as a guide to taxpayers, the IRB provided in PR 3/2008 a list of expenses which in its view would qualify for full deduction as being wholly related to sales. The list, which is non-exhaustive, includes: -

 

  • Expenses incurred on food and drink during the launching of a new housing project;
  • Redemption vouchers and lucky draw prizes given for purchases made;
  • Free gifts for purchases exceeding a certain amount;
  • Redemption of gifts based on a scheme of accumulated points;
  • Free service charges or contribution to sinking fund by property developers;
  • Expenditure on trips given as an incentive to dealers for achieving sales target;
  • Expenditure incurred on refreshments given to its customer while waiting for their cars to be serviced.

 

 

(8) Leave of passage to employees and their family

The expenditure incurred in the provision of a benefit to an employee consisting of leave passage, i.e. the costs of travel, to facilitate a yearly event within Malaysia which involves the employer, employee and immediate family members of that employee are fully deductible.

 

 

50% DEDUCTIBLE ENTERTAINMENT EXPENSES

Entertainment expenses which are wholly and exclusively incurred for the production of income but which do not fall under any of the above categories of expenses are only allowed a 50% deduction.

 

 

RECORD KEEPING

Like any other financial records, taxpayers are advised to keep proper records of expenses incurred on the provision of entertainment for a minimum period of 7 years. Such records should include copies of all invoices and receipts, relevant contracts and correspondence, samples or photos of promotional items given away and copies of redemption vouchers, as applicable.

 

Taxpayers should distinguish between records of entertainment expenses which are fully deductible from those which are only 50% deductible and non-deductible for ease of reference and verification in the event that the IRB requires the same to be produced in future.

 

 

HAROLD TAN KOK LENG ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 

 

 
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