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Tax Deduction on Travel and Entertainment Expenses in Malaysia

Tax Deduction on Travel and Entertainment Expenses in MalaysiaIn Malaysia, the tax treatment of travel and entertainment expenses is governed by the Income Tax Act 1967 (ITA). These expenses, often incurred in the ordinary course of business, are subject to specific rules and limitations that determine their deductibility. Companies must adhere to these regulations to ensure compliance and optimize their tax liabilities.

 

 

Travel Expenses

1. General Deductibility:

Under Section 33(1) of the ITA, travel expenses are generally deductible if they are wholly and exclusively incurred in the production of gross income. This includes costs associated with business trips, such as airfare, accommodation and transportation. However, any expenditure that is of a private or domestic nature, or not directly related to the generation of taxable income, is non-deductible.

2 Conditions for Deductibility:

To qualify for tax deduction, the travel expenses must meet the following conditions:

  • The travel must be for business purposes, directly related to the company’s operations.
  • Adequate documentation, such as receipts and travel itineraries, must be maintained to substantiate the expenses.
  • Expenses should be reasonable and within the norms of business practice. Excessive or extravagant spending may be disallowed by the Inland Revenue Board of Malaysia (IRBM).

3. Specific Non-Deductible Expenses:

The ITA explicitly disallows certain types of travel-related expenditures. These include:

  • Travel for non-business purposes, such as vacations or personal trips.
  • Travel expenses incurred by family members or companions, unless they are employees involved in the business activities.
  • Expenses related to commuting between home and the workplace, as these are considered private expenses.
  • Generally, leave passage expenses are non-deductible. However, an exception is made for passage expenditure incurred by an employer to facilitate a yearly event within Malaysia which involves the employer, employee and immediate family members of that employee.

 

Entertainment Expenses

1. Definition and Scope:

Entertainment expenses refer to expenditures incurred in providing entertainment, including meals, drinks, hospitality, and other forms of entertainment offered to clients, suppliers, or employees. Generally, entertainment expenses are divided into three types: deductible, 50% deductible and non-deductible.

2. Fully deductible entertainment expenses：

Entertainment expenses are fully deductible if they fall under any of the items (i) to (viii) of Section 39(1)(l) of the Income Tax Act. These include:
i) the provision of entertainment to employees;

ii) the provision of entertainment for payment in the ordinary course of business;

iii) the provision of promotional gifts at trade fairs or trade exhibitions or industrial exhibitions outside Malaysia;

iv) the provision of promotional samples of products of the business;

v) the provision of entertainment for cultural or sporting events open to members of the public wholly to promote the business;

vi) the provision of promotional gifts within Malaysia of articles incorporating the logo of the business;

vii) the provision of entertainment related wholly to sales arising from the business; or

viii) the provision of leave passage benefit provided to an employee to facilitate a yearly event within Malaysia which involves the employer, the employee and the immediate family members of that employee.

4. 50% Deductible Entertainment:

Entertainment expenses that do not qualify for full deductibility under specific provisions are subject to a 50% deduction. This includes costs related to entertaining existing clients, suppliers, and other business associates.

5. Non-Deductible Entertainment:

Entertainment expenses that are not wholly and exclusively incurred for the production of gross income, or those deemed excessive or not directly related to business activities, are non-deductible. This includes:

  • Lavish entertainment events that do not have a clear business purpose.
  • Entertainment provided to shareholders or directors, unless directly tied to the business’s income-generating activities.
  • Entertainment provided to potential customers.

 

Compliance and Record-Keeping

1. Documentation Requirements:

To claim tax deductions on travel and entertainment expenses, companies must maintain detailed records, including:

  • Receipts and invoices for all expenses claimed.
  • A clear explanation of the business purpose for the expenditure.
  • Logs or itineraries for travel expenses, specifying the business activities conducted during the trip.

2. Audit and Verification:

The IRBM reserves the right to audit these expenses. Companies must ensure that all claims are substantiated with appropriate evidence to avoid penalties or disallowance of deductions.

 

Conclusion

In Malaysia, the tax deductibility of travel and entertainment expenses is governed by stringent rules designed to ensure that only legitimate business expenses are claimed. Companies must exercise diligence in maintaining comprehensive records and ensuring that their claims are in full compliance with the ITA. By adhering to these guidelines, businesses can effectively manage their tax liabilities while remaining compliant with Malaysian tax laws.