Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Profits Tax -  Entertainment expenditure

Generally speaking, entertainment expenditure is tax deductible. This is because the expenditure is mostly incurred in the course of the business and therefore it satisfies the Section 16(1) condition, viz: "incurred in the production of assessable profits".

In the case Bentleys, Stokes and Lowless versus Beeson 33 TC 491, a firm of solicitors claimed the cost of entertaining clients. It was held that the expenditure was deductible because it had been made for promotion of business. The judge ruled that the fact that the firm partner received some benefit from the expenditure could not change its purpose that qualified the deduction.

In practice, all business entertainment is allowable deduction. Usually, the IRD does not raise query on the expenditure unless the amount is big or unreasonable. Then, the IRD's usual challenge on the expenditure is: to what extent the expenditure is incurred in the production of profits. Depending on the amount claimed and the information available, the IRD will disallow the portion that is, in its opinion, not attributable to production of profits. In that case, if the taxpayer does not agree to the disallowance, he will have to lodge a formal objection. As stipulated in Section 68(4) of IRO, the burden of proof that the assessment is excessive is on the taxpayer. Therefore, it is advisable for the claimant to keep record of such expenditure including date, purpose of entertainment, name of client, vouchers and bills.

In the Hong Kong tax case Stanley So & Company, it was held that certain entertainment expenses are disallowed because they are regarded as not in the production of chargeable profits. Click here for details.

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