For businesses in Malaysia, entertainment expenses are often an essential part of business operations, particularly in roles that involve client engagement and employee events. Specific provisions under the Malaysian Income Tax Act 1967 (ITA) and public rulings (PR) issued by the Malaysian IRB (IRB) provide guidelines on how these expenses should be treated for tax purposes.
Based on PR 4/2015, the important definitions are as follows:
a. Entertainment is defined in section 18 of the ITA as the provision of the following:
Food and drinks
Recreation or hospitality
Accommodation or travel
.....by the taxpayer or his employee, with or without consideration paid, in cash or in-kind, in promoting or in connection with a business operated by the taxpayer.
b. Entertainment related to wholly to sales
Entertainment directly related to sales provided to customers, dealers and distributors, excluding suppliers.
c. Promotion
An activity to inform and to offer a product or service which is to be marketed to customers, dealers, and distributors but excludes suppliers. An activity undertaken to advertise the sale of the product or service.
Principle of the tax deduction on entertainment expenses
According to section 18 of the ITA, expenses related to food, drink, recreation, hospitality, accommodation, or travel provided by a business or its employees are generally treated as entertainment expenses when they are directly associated with business operations.
Only those entertainment expenses incurred wholly and exclusively in producing gross income are eligible under subsection 33(1) of the ITA for tax deduction purposes. However, subsections 39(1) of the ITA further categorises entertainment expenses and prohibits certain expenses as follows:
Expenses “wholly and exclusively incurred in the production of gross income” is allowed for deduction under subsection 33(1) of the ITA, subject to specific prohibition under subsection 39(1).
Entertainment expense which qualifies for deduction under subsection 33(1) is restricted to 50% deduction under subsection 39(1)(l), except if it falls within any of the categories specified in provisions (i) to (viii) of subsection 39(1)(l) (in which case it would qualify for 100% deduction).
No deduction for entertainment expense is allowed if it does not fall within the definition of “entertainment” in section 18 of the ITA.
An expense which falls within the definition of “entertainment” is not allowed to be deducted if it does not meet the requirements of subsection 33(1) of the ITA.
An expense which meets both the above requirements is allowed a deduction of 100% if it falls under any of the provisions (i) to (viii) of subsection 39(1)(l). If it does not fall under any of the provisions, only 50% is allowable.
The diagram above is a guide on application of section 18, subsection 33(1) and subsection 39(1) on entertainment expense. Source: PR 4/2015
Types of entertainment expenses eligible for 100% or 50% deduction
The ITA outlines two main categories for the deduction of entertainment expenses:
100% deduction:
Entertainment expenses that are not prohibited under specific provisions in paragraph 39(1)(l), such as certain trade shows, marketing activities, or staff welfare programs, may be fully deductible. These must be directly related to income generation and fulfil the requirements listed under provisions (i) to (viii) of subsection 39(1)(l) to be eligible for the 100% deduction as illustrated below.
Entertainment expenses that qualify for a 100% deduction | Income tax act |
Expenditure on food, drink and recreation to employees | S. 39 (1) (l) (i) |
Entertainment for customers in the ordinary course of business where payment is imposed for its provision | S. 39 (1) (l) (ii) |
Promotional gifts at trade fairs or trade exhibitions or industrial exhibitions outside Malaysia for the purpose of promoting exports from Malaysia. | S. 39 (1) (l) (iii) |
Promotional samples of products of the business for the purpose of advertising that product | S. 39 (1) (l) (iv) |
Provision of entertainment for * Cultural or sporting events open to the public wholly to promote the business - * Cultural event means an event which is specifically held to promote arts activities. | S. 39 (1) (l) (v) |
Promotional gifts within Malaysia consisting of articles incorporating a conspicuous advertisement or logo of the business | S. 39 (1) (l) (vi) |
Entertainment which is related wholly to sales arising from the business (Note: Vouchers, coupons, tickets, gifts and so on are only allowed as entertainment expenses when customers have redeemed them.) | S. 39 (1) (vii) |
Leave passage benefit provided for employees by employers to facilitate a yearly event within Malaysia which involves the employer, employees and immediate family members of the employees | S. 39 (1) (l) (viii) |
50% deduction:
Entertainment expenses that qualify for 50% deduction | Income tax act |
Entertainment expenditure that falls within subsection 33(1) of the ITA (wholly and exclusively incurred in the production of gross income) but does not fall under any of the provisions (i) to (viii) of subsection 39(1)(l) only qualifies for a deduction of 50% of the amount incurred. | Subsection 39(1)(l) |
Steps to ascertain tax deduction on entertainment expenses
To properly assess the deductibility of entertainment expenses, business owners should refer to Public Ruling No. 4/2015, which provides guidance on interpreting and applying these rules.
Key steps include:
Categorising expenses: Identify if the entertainment expenses that are deductible under subsection 33(1) and those that are not allowed for deduction under subsection 39(1).
Applying deduction rate: Apply the correct deduction rate of 50% or 100% based on the nature and purpose of the entertainment expense.
Documenting justification: Ensure thorough documentation and reasoning to support the deduction claims in case of tax audits.
The diagram below will help you categorise expenses as either 100% deductible, 50% deductible, or non-deductible:
The above article is based on PR 4/2015 issued by Malaysian IRB on 29 July 2015. By following these guidelines, businesses can optimise their tax deductions on entertainment expenses while ensuring compliance with Malaysian tax laws. To better understand your specific situation, it's essential to consult with a tax professional who can provide personalised guidance.
Please note that tax laws can change, and it's essential to verify the latest updates with the authority or consult a tax professional to ensure that you're submitting your tax returns based on the most recent regulations.
For further clarification, please feel free to reach out to us at gunalan@gskassociates.net or contact the manager with whom you typically engage or who oversees your organisation's tax matters.