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ENTERTAINMENT EXPENSES
 
Reference is made to Public ruling No.3/2004 of the Malaysian Income Tax guidelines and Income Tax Act. 1967(“ITA 1967”), Entertainment is define as follows:
 
a)      the provision of food, drink, recreation or hospitality of any; or
b)      the provision of accommodation or travel in connection with or for the purpose of
      facilitating entertainment of the kind mentioned in Section 18, subsection 33(1),  
      paragraph 39(1)(l) and (m) of the ITS 1967,
 
 by a person or an employee of his in connection with trade or business carried on by that person.
 
“Entertainment related wholly to Sales” means the entertainment which is directly related to sales provided to customers, dealers and distributors excluding suppliers.
 
“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)      gift and give-aways.
 
Generally, an expense that is wholly and exclusively incurred in the production of income is allowable as a deduction against gross income under subsection 33(1) of the ITA 1967. Expenses that are included in subsection 39(1) of the ITA 1967 are disallowed against gross income.
 
In this respect, “Entertainment “ as define under Section 18 of ITA 1967 which are wholly and exclusively incurred in the production of income under subsection 33(1) of the ITA 1967 a sum equal to fifty per cent (50%) of such expenditure would be disallowed under paragraph 39(1)(l) of the ITA 1967 except for the categories of entertainment expenses specified in proviso (i) to(vii) of paragraph 39(1)(l) of the ITA 1967.
 
Proviso to paragraph 39(1)(l) of the ITA 1967
 
Entertainment expenses would be wholly allowable and illustrated as below:
 
a)      Entertainment to employees;
b)      Payment in the ordinary course of business;
c)      Promotional gifts at trade fairs or trade or industrial exhibition outside Malaysia;
d)      Promotional samples of products of the business;
e)      Cultural and sporting events open to members of the public wholly to promote the
      business;
f)        Promotional gifts within Malaysia of articles incorporating the logo of the business; and
g)      Related wholly to sales arising from the business.
 
Expenses disallowed under paragraph 39(1)(l) of the ITA 1967
 
Entertainment expenses which are wholly and exclusively incurred in the production of income under subsection 33(1) of the ITA 1967 and which do not fall into any of the categories of expenses enumerated in the proviso to paragraph 39(1)(l) of the ITA 1967 would only qualify for 50% deduction. Such expenses would be as follows:
 
a)      incurred in connection with specific business transaction;
b)      existing clients or suppliers are entertain; and
c)      allowances paid to employees for the purpose of defraying expenses incurred by the employees in the provision of entertainment.
 
NOTE:
1)      Taxpayers are required to keep records in respect of the entertainment expense and the categories into which the entertainment expense can be identified with. This ruling is effective for the year assessment 2004 and subsequent years of assessment.

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