INLAND REVENUE BOARD OF MALAYSIA ENTERTAINMENT

INLAND REVENUE BOARD OF MALAYSIAENTERTAINMENT EXPENSEPUBLIC RULING NO. 4/2015Translation from the original Bahasa Malaysia text.DATE OF PUBLICATION: 29 JULY 2015

ENTERTAINMENT EXPENSEINLAND REVENUE BOARD OF MALAYSIAPublished byInland Revenue Board of MalaysiaSecond editionFirst edition on 22.10.2008 2015 by Inland Revenue Board of MalaysiaAll rights reserved on this Public Ruling are ownedby Inland Revenue Board of Malaysia. One print orelectronic copy may be made for personal use.Professional firms and associations are permitted touse the Public Ruling for training purposes only.Systemic or multiple reproduction, distribution tomultiple location via electronic or other means,duplication of any material in this Public Ruling for afee or commercial purposes, or modification of thecontent of the Public Ruling are prohibited.Public Ruling No. 4/2015Date Of Publication: 29 July 2015

ENTERTAINMENT EXPENSEINLAND REVENUE BOARD OF MALAYSIAPublic Ruling No. 4/2015Date Of Publication: 29 July 2015CONTENTSPage1.Objective12.Relevant Provisions of the Law13.Interpretation14.Application of the Law25.Deduction for Entertainment Expense26.Principles in Determining the Allowable Entertainment Expense37.Entertainment Expense which Qualifies for a One Hundred Percent(100%) Deduction48.Entertainment Expense which Qualifies for a Fifty Percent (50%)Deduction89.Promotion Expense is Part of Entertainment Expense910. Steps to Determine Allowable Entertainment Expense1311. Records of Entertainment Expense1412. Updates and Amendments15DIRECTOR GENERAL'S PUBLIC RULINGSection 138A of the Income Tax Act 1967 (ITA) provides that the Director Generalis empowered to make a Public Ruling in relation to the application of anyprovisions of ITA.A Public Ruling is published as a guide for the public and officers of the InlandRevenue Board of Malaysia. It sets out the interpretation of the Director General inrespect of the particular tax law and the policy as well as the procedure applicableto it.The Director General may withdraw this public ruling either wholly or in part, bynotice of withdrawal or by publication of a new Public Ruling.Director General of Inland Revenue,Inland Revenue Board of Malaysia.

ENTERTAINMENT EXPENSEINLAND REVENUE BOARD OF MALAYSIA1.Public Ruling No. 4/2015Date Of Publication: 29 July 2015ObjectiveThe objective of this Public Ruling (PR) is to explain -2.3.(a)the tax treatment of entertainment expense as a deduction against grossincome of a business; and(b)steps to determine the amount of entertainment expense allowable as adeduction.Relevant Provisions of the Law2.1This PR takes into account laws which are in force as at the date this PR ispublished.2.2The provisions of the Income Tax Act 1967 (ITA) related to this PR aresection 18, subsection 33(1) and paragraph 39(1)(l).InterpretationThe words used in this PR have the following meanings:3.1“Immediate family members” means an employee’s wife or wives and hischildren or an employee’s husband and her children.3.2“Child” means a legitimate child or stepchild of an employee, his wife or herhusband or a child proved to the satisfaction of the Director General to havebeen adopted by the employee, his wife or her husband in accordance withany written law.3.3“Entertainment” includes:(a)the provision of food, drink, recreation or hospitality of any kind; or(b)the provision of accommodation or travel in connection with or for thepurpose of facilitating entertainment of the kind mentioned inparagraph (a) above,by a person or an employee of his, with or without consideration paid whetherin cash or in kind, in promoting or in connection with a trade or businesscarried on by that person.3.4“Entertainment related wholly to sales” means entertainment directly relatedto sales provided to customers, dealers and distributors but excludingsuppliers.3.5“Employer”, in relation to an employment, means:(a)the master, where the relationship of master and servant subsists;Page 1 of 15

ENTERTAINMENT EXPENSEINLAND REVENUE BOARD OF MALAYSIA(b)3.63.74.Public Ruling No. 4/2015Date Of Publication: 29 July 2015where the relationship of master and servant does not subsist, theperson who pays or is responsible for paying any remuneration to theemployee who has the employment, notwithstanding that that personand the employee may be the same person acting in differentcapacities.“Employee”, in relation to an employment, means:(a)the servant, where the relationship of master and servant subsists;(b)where the relationship of master and servant does not subsist, theholder of the appointment or office which constitutes the employment."Employment" means:(a)employment in which the relationship of master and servant subsists;(b)any appointment or office, whether public or not and whether or notthat relationship subsists, for which remuneration is payable.3.8“Promotion” means an activity to inform and to offer a product or servicewhich is to be marketed to customers, dealers and distributors but excludingsuppliers and an activity undertaken to advertise the sale of the product orservice.3.9“Recreation and hospitality” would include:(a)a trip to a theme park or a recreation centre;(b)a stay at a holiday resort;(c)tickets to a show or theatre; and(d)gifts and give-aways.Application of the LawGenerally, under subsection 33(1) of the ITA, an expense which is wholly andexclusively incurred in the production of gross income from a source is allowable as adeduction against gross income from that source. However, the allowable expenseunder subsection 33(1) of the ITA is subject to specific prohibition under subsection39(1) of the ITA.5.Deduction for Entertainment ExpenseAn entertainment expense that is wholly and exclusively incurred in the production ofgross income under subsection 33(1) of the ITA is allowed a deduction of fifty percent(50%) only unless that expense falls within any of the specified categories in provisos(i) to (viii) of paragraph 39(1)(l) of the ITA, then it qualifies for a deduction of onehundred percent (100%).Page 2 of 15

ENTERTAINMENT EXPENSEINLAND REVENUE BOARD OF MALAYSIA6.Public Ruling No. 4/2015Date Of Publication: 29 July 2015Principles in Determining the Allowable Entertainment ExpenseIn determining whether an entertainment expense can be allowed as a deduction andthe amount to be allowed as a deduction, the following steps have to be adhered to:(a)Determine whether the expense falls within the definition of entertainment asprovided under section 18 of the ITA. No deduction is allowed asentertainment expense if the expenditure does not fall within the definition ofentertainment.Example 1Megah Jaya Sdn Bhd held an annual dinner for its employees and incurred acost of RM10,000.The expense of RM10,000 incurred by Megah Jaya Sdn Bhd is anentertainment expense under section 18 of the ITA.(b)If the expense falls within the definition of entertainment provided undersection 18 of the ITA, determine whether the expense is wholly andexclusively incurred in the production of gross income under subsection 33(1)of the ITA. If the expense is not wholly and exclusively incurred in theproduction of gross income, then the expense is not allowed a deduction. Thetest under subsection 33(1) of the ITA is also applicable to entertainmentexpense as it is applicable to other expenses.Example 2Wendy Sdn Bhd gave its customer a microwave oven as a wedding gift.The expense incurred on the wedding gift is an entertainment expense but isnot allowed a deduction because it is not wholly and exclusively incurred inthe production of gross income under subsection 33(1) of the ITA.Example 3A real property sales agent made an appointment with Mr. Ravi at arestaurant to discuss the purchase of a house proposed by the agent. Theagent incurred the whole cost of lunch for himself and his poten ion with abusiness or promotionYesNoEntertainmentsection 18Nosubsection33(1)Expense notallowed as adeductionNosubsection33(1)YesProvisos (i)to(viii) toparagraph39(1)(l)NoYesExpenseallowed adeductionof 50%YesExpenseallowed adeductionof 100%Page 12 of 15

ENTERTAINMENT EXPENSEPublic Ruling No. 4/2015Date Of Publication: 29 July 2015INLAND REVENUE BOARD OF MALAYSIA10. Steps to Determine Allowable Entertainment ExpenseThe principles mentioned in paragraph 6 should be applied in determining the amountof allowable entertainment expense. Table 1 illustrates the tax treatment for severalexamples of entertainment expense:Table 1:NoTypes ofentertainmentAllowed adeduction of100%100% 1 Entertainment giventoapotentialcustomer in a closedtransaction2 Entertainment givento potential or existingcustomers during thelaunchingofcompany’snewproduct50%Not alloweda deduction of ITA Provision50%Not wholly andexclusively incurredunder subsection33(1) of the ITAProviso (vii) toparagraph 39(1)(l)of the ITAto Not wholly andexclusively incurredunder subsection33(1) of the ITA4 Entertainmenttoemployees of relatedcompanies Not wholly andexclusively incurredunder subsection33(1) of the ITA5 Entertainmentforannualgeneralmeeting of company Not wholly andexclusively incurredunder subsection33(1) of the ITA6 Cash contribution forcustomer’sannualdinner Not wholly andexclusively incurredunder subsection33(1) of the ITA3 Weddingcustomer7 Annualgiftdinnerfor Proviso (i) toPage 13 of 15

ENTERTAINMENT EXPENSEPublic Ruling No. 4/2015Date Of Publication: 29 July 2015INLAND REVENUE BOARD OF MALAYSIANoTypes ofentertainmentAllowed adeduction of100%50%Not alloweda deduction of100%ITA Provision50%employeesparagraph 39(1)(l)of the ITA8 Gift with businesslogo for customer’sannual dinner 9 Gift without businesslogo for customer’sannual dinner10 Free trip as anincentive to salesagent for achievingthe sales targetProviso (vi) toparagraph 39(1)(l)of the ITA Not included underprovisos (i) to (viii)to paragraph39(1)(l) of the ITAProviso (vii) toparagraph 39(1)(l)of the ITA 11 Gift of flower forcustomer’s opening ofnew outlet Not included underprovisos (i) to (viii)to paragraph39(1)(l) of the ITA12 Entertainmentsuppliersto Not included underprovisos (i) to (viii)to paragraph39(1)(l) of the ITA13 Hampersforcustomersduringfestive seasons Not included underprovisos (i) to (viii)to paragraph39(1)(l) of the ITA11. Records of Entertainment ExpenseTaxpayers are required to keep records in respect of entertainment expense incurred.Page 14 of 15

ENTERTAINMENT EXPENSEPublic Ruling No. 4/2015Date Of Publication: 29 July 2015INLAND REVENUE BOARD OF MALAYSIA12. Updates and AmendmentsAmendmentThis PR replaces the PR The contents of this PR are essentially the same asNo.3/2008dated the previous PR with the following fiesthedefinitionofentertainment in section 18 of theITA. The section is amended byFinance Act 2014 [Act 761] which iseffectivefromtheyearofassessment 2014.7.6Inserting new Example 6.9The diagram in paragraph 6(d) ofthe previous PR is amended andrenumbered.Inserting new examples 13, 14 and15.Director General of Inland Revenue,Inland Revenue Board of Malaysia.Page 15 of 15

entertainment expense if the expenditure does not fall within the definition of entertainment. Example 1 Megah Jaya Sdn Bhd held an annual dinner for its employees and incurred a cost of RM10,000. The expense of RM10,000 incurred by Megah Jaya Sdn Bhd is an en