Corporate gifts and entertainment are essential for building goodwill, but they're also a notorious tax "grey area." Where does a non-taxable gift end and taxable income begin? And how can your business ensure its entertainment expenses are 100% deductible?

Tax expert SM Thanneermalai of Thannees Tax Consulting Services joins us to navigate these "grey areas." He explains the critical difference between a personal gift and a taxable business transaction, the rules for 50% vs. 100% deductions, and why meticulous documentation is your best defense in an audit.

We discuss:

• When a "gift" is (and is not) taxable income for the recipient.
• The "50% vs. 100%" rule for deducting entertainment expenses.
• How to claim a 100% deduction (e.g. staff entertainment, promotional items with logos).
• The tax implications of "grey areas" like large monetary gifts and nominees.
• The critical documentation businesses must keep to justify their claims.
• For business owners and finance teams, this is an essential exploration into navigating the tax rules of gifts and entertainment, especially as tax authorities become more sophisticated.

Image credit: Shutterstock

Presenter: Roshan Kanesan
Producer: Roshan Kanesan

Podcast Transcription

Roshan Kanesan:
Good afternoon, I'm Roshan Kanesan and welcome to Enterprise Explores, the show where we help you navigate the ever-changing universe of business, money, and technology. As we head into more festive seasons towards the end of the year, acts of generosity from hampers and dinners to year-end appreciation gifts are a staple of business cultures across the world, particularly in Asia.

But while these gestures help build relationships, they also raise important questions, such as, where does goodwill end and tax liability begin? Today, we unpack how Malaysia's tax system views gifts, hospitality, and entertainment expenses, and why these rules can be misunderstood and misapplied towards accounting and business practices. Joining me to help break this all down with us is SM Thanneermalai, Managing Director of Thannees Tax Consulting Services. Thannee, it's always good to see you. How are you doing?

Thanneermalai:
Pretty good, actually. So far, so good. The year-end is soon coming, we'll just have to wait for the wonderful festive season of Christmas and New Year. Look forward and hopefully we all will get gifts. Somewhere, like it's said, either like Father Christmas does, provides gifts to the children. Someone, we look forward to receiving gifts from the government than the others.

Roshan Kanesan:
Now, we've just gone through the Deepavali festive season. We're going to go into the end-year season, which is always very big. So let's start with a bigger picture view here, Thannee. Why does something like festive or corporate gifting even matter when it comes to tax here in Malaysia?

Thanneermalai:
It's important because at the end of the day, you've got the basic principle. If the gift is actually given in relation to your exercising the employment, or if a gift is received in connection with the business transactions you've undertaken, then that will be brought to tax. But you see, majority of the time when you talk about the festive seasons, et cetera, we give gifts, hampers, and then you get all the gifts during Hari Raya, Deepavali, and Christmas and New Year. You'll get cakes and we'll get all that.

Now, those gifts, really, if you think about it, are given on a personal level because they want your continued service. They want your goodwill, and they are friends more than anything else. And they say, look here, let me give it to you on a personal level. Such gifts, actually, do not attract tax because it's given purely without any expectation in return. If I get a hamper at Deepavali, for example, and they give me a cake and they give me all these sweets, they don't expect anything back from me.

They just want to be my friend, and they want to continue that relationship at a different level. And therefore, it becomes personal. It is not taxable. Even if they give me a RM600, RM800, RM1,000 hamper, it's not going to be taxable and I'm not going to declare it because it is a personal appreciation of my friendship and relationship with them. So that's where it is from.

But you see, in tax, first of all, Roshan, you cannot look at it in a symmetrical form—if one guy is actually taxed, the other guy should get a deduction. No, it doesn't work like that. You want to look at each person separately. When I receive the gift for a festive season, I'm receiving it on a personal level, not in connection with a business, although we have the relationship. But it's not purposely intended to get any benefit from me in terms of a service, in terms of anything back from me.

So I won't bring it to tax as a recipient. But the company that is giving it is just saying, look here, I need to build a relationship with this person who is perhaps an expert on something and who knows when I need them, etc., which I also use this person from time to time. It is necessary to build that goodwill. So you can actually look at it and say, hey, I can claim a deduction. It's a form of actually continuing growing my business, and it's in relation to it. In some cases, you can even argue that when you give away these gifts on a massive, bigger level, it is advertising.

But let me go one more step, Roshan. The word "gift" in Malaysia connotates a bad word here, because sadly, the 1MDB case, where everything was given, the question comes to, when donations and all this got mixed up between donations and gifts. So does it mean that if you give gifts, will you be caught up?

You've got to be careful also because at the end of the day, when you receive large gifts, perhaps RM1 million, RM10 million, RM30 million, etc., even to your own next of kin and others, suspicion will be there: is this a real gift? Because the person receiving this money will say it's a gift and it's not taxable. Whereas the authorities will say, hey, that's not a gift, you're receiving this money—RM2 million, RM3 million, or half a million, or maybe you're receiving RM500,000 or RM100,000 on a regular basis. And they'll examine it and see, because it's recurring more often, it's not a once-in-a-lifetime thing, it's more than once in the year you're getting it. So is this income? They then tend to look, and if a third party gives you and says it's a gift, then it has to be very clearly given gratuitously, not expecting anything in return. It's got to be very clear. Otherwise, the chances are the Inland Revenue will ask the person who is receiving it, hey, this is not a gift.

I can go into another example also, when you have this "Ali Baba" type—that is, it's not uncommon where there are people who act as nominees, as directors, etc. Effectively, they won't own the company, and they'd be probably on paper owning 51% of the company. The money, the dividends will come in, and then usually the nominees are handing over the money to the real beneficial share owner who does the service.

Now, in that kind of situation, if the nominee share owner says it's a gift, and this is happening at least every year, and it's happening more than once a year, the question is then the tax authorities may ask the question: what is this? Is it really a gift, or is this money entirely due to you? Although that money may not be taxable, the problem is it's passing through another hand and it's being given to you. It's a grey area, but it's a problem that's quite common in Malaysia using nominees.

Roshan Kanesan:
So, a few of the core issues, if I'm hearing correctly, is one on the expense side: when you're giving a gift, the business expense, or you're giving it to an employee, these are two particular issues. Then on the income side, if you receive a gift, do you need to think about whether to bring it to tax or not? In most cases, if it's a personal thing—you're building a relationship or continuing a relationship—not necessarily so, but then we also enter this grey area of when a gift becomes considered income in kind versus essentially corruption. Am I getting some of the core issues here right?

Thanneermalai:
Because some people will disguise something that is intertwined with corruption as a gift, and you receive it and say, this is a gift. Frankly, you've got to then look at the relationship. What the Revenue will look at is, when you're receiving a gift from somebody, why should that person give it? It is not like he's doing it out of kindness, he just gives you a gift on a regular basis. Then it becomes: why did he give it to you? Is there some form of an income transaction? Is there some income element? Is there any potential... then they will bring it in under an unknown section, as many people don't know, it's not the normal business section, there's something called Section 4(f).

They'll try to tax it because at the moment—I'm afraid to say—the tax authorities are trying to find where to find that extra tax, because the government wants the taxes to be collected so that the deficit is reduced. Of course, they're working within the law, but this law is not exactly in black and white, there is a wonderful grey area. So you end up with both sides—the Income Tax Department or even Customs—saying, "This is a grey area, I'm entitled." Whereas the taxpayer says he's in a grey area and he should not be taxed. This is where the tussle comes in. You're sitting in a playground, playing football, but there is an overlapping area where the two of you are tackling one another.

Roshan Kanesan:
Today, I'm speaking with Thanneermalai, Managing Director of Thannees Tax Consulting Services, and we're exploring how Malaysia's tax system handles gifts and festive season goodwill, and why these small gestures can sometimes have implications in terms of your tax, your compliance, or even your accounting.

Thannee, you set the lay of the land a little bit earlier for us. Generally speaking, how does Malaysia's tax framework treat gifts, whether festive or not, and hospitality as well? Are these business expenses? You mentioned earlier something about marketing as well. Tell us more about this.

Thanneermalai:
I'll tell you what, entertainment is not entirely discouraged. So what happens is when there is entertainment, there's a general rule if it falls within entertainment, whether it's gifts, whether it's entertainment when it comes to restaurants, food, drinks, et cetera. If you are entertaining somebody who is a third party and it's in relation to your business, then you get a 50% deduction automatically. The problem is always 100%. If it is for your customers in relation to growing the business, getting new sales, getting new orders, et cetera, 100%, because you're promoting the sales. But if you're actually dealing with the supplier—I'm telling you the practical thing that happens—when you're dealing with suppliers, for example, you're entertaining them, technically you should get 100%. Normally, one would think you're also promoting your business, but it's not looked at the same way; you're only being entitled to the 50%. That's the ground rule, that's the kind of thing that is happening.

Roshan Kanesan:
Sorry, Thannee, we got caught up earlier when you explained the 50% part. Could we go back to that, please?

Thanneermalai:
Yeah. You get a 50% deduction automatically when any form of entertainment—can be food, drink, can be also gifts, et cetera—it all comes within that, you will get it. There was a time when we didn't give entertainment deductions at all, then we came up with this 50%, and this has been going on for decades. I'm telling you about the history, but now the present position in the last decade is they give you that 50%. It's the question of whether you want to get the 100%, and for 100%, it has to be different. If you're entertaining your customers to get new business, new orders, et cetera, you can get that. Or if you're giving something to promote your business, and you say, this is actually going to be benefiting my business to grow the business. You've got to come in from the angle that whatever you're doing is intended to grow your business, then you get the 100%.

In simple terms, that's the way. I don't want to go into any technicality, but that's the thinking. So if you grow the business and you spend the money on it, and you entertain them in the form of all these things, whether it's gifts, et cetera, you will get the 100%. So we are quite generous, relatively speaking to all the other countries. We don't exactly restrict it or disallow you; we allow you, because it is accepted that doing business means entertaining people—entertaining potential customers, et cetera. Otherwise, it's a big disadvantage.

Even if you give a lot of... like year-end calendars, you're giving away, all that is deductible.

Roshan Kanesan: And when we say deductible, you're talking about as an income deduction?

Thanneermalai:
Yes, income deduction. Against your income, you set off and you're claiming the 100%. Now, you give away your year-end diaries, year-end calendars, you have all these year-end gifts that you give to your customers—all that is 100% deductible, not 50%. The 50% comes in when you do general entertainment with restaurants, food, drinks, et cetera, and you're dealing with third parties. And you're not sure whether you're going to get the business or not, then you're entitled to the 50%.

Traditionally, Malaysia has not entirely disallowed it, because there was a time when people were abusing this entertainment. In the sense, there was a time when people were actually entertaining their families, et cetera, putting in all these bills. So the government was very reasonable and said, if you really think you're entertaining and doing it not so much for the family, but you're doing business—sometimes you're just friends, they're not going to bring in the business at all, but who knows, they may help you—so they decided not to have a fight with the taxpayers. They gave you 50% and said, go ahead.

Roshan Kanesan:
So we're going to have to just pay attention to whether this is something that you believe will bring in business for sure. That's where the 100% deduction can come in. But if you're not sure, if it's general purpose entertainment, then it's 50%.

Thanneermalai: Automatically, you get your 50%. So it's not that difficult.

Roshan Kanesan:
All right. So this is one key area that sounds like it can bring up confusion or uncertainty for businesses when they're looking at gifting and how it impacts their taxes. Are there any other areas that cause confusion here?

Thanneermalai:
If you keep to spending away, for example, if you give something away and you put your company logo, you get a 100% deduction. So for whatever you do, if you're giving away a t-shirt, put the company logo, you get the 100% deduction. Insert your logo—that's my advice. That's certainly something that you can use because that's a promotional element.

But you've got to be careful. If you're going out for dinner and you have eight of you at the dinner, and if you have one non-client and seven of your staff on the table—all your staff and one gentleman is a client or not a staff member—the whole bill for the eight people would be only for a 50% deduction. So these are some of the areas where you don't get the 100%. Sometimes you may need to keep them at another table.

Roshan Kanesan:
If we were to double click on that, Thannee, what are other areas where these kind of business expenses can become non-deductible, or at least go from 100% to 50%? What is most common?

Thanneermalai:
Particularly, the most common mistake that people make is when they get one bill from the restaurant with two non-employees and eight employees. Then, automatically, it becomes 50%. Then, if you are having lunch or dinner or giving away gifts to suppliers, et cetera, they take the view that it's not exactly promotional, it's not directly relating to increased sales. They're not looking at it from the whole supply chain. I wish this thing would be discussed, but if you look at it from business in totality, you need suppliers also to be on good terms with you. That too increases your profits if they supply on time with good quality and good prices. But we only look at the sales side.

So that's another issue. Now, if it is becoming very personal and you're giving away large gifts, then that's also an issue where you have this 100% disallowed sometimes.

There are other things. Sometimes you're a manufacturer of, say, furniture, or a manufacturer of food products. Whatever that you withdraw for your personal use, that too, you've got to bring it to tax in the company, saying how much value I have taken out. If I take out RM100 of goods, you've got to bring the profit margin to tax, which is called withdrawal of stock. The company will be taxed on that, even though you didn't pay for it and you took it out and enjoyed it. So you've got to be careful. You can't self-gift yourself. That will be income to the company to be taxed.

Roshan Kanesan: And the implication there is that it is brought to the company to tax?

Thanneermalai:
Yes, it is brought to the company. Because if you've taken out something that could have been sold to third parties at a profit, they're saying, please, even though you didn't pay for it, we'll still take it as a promotional profit. It will be brought to tax.

Roshan Kanesan:
Right, right. It's almost like an opportunity cost here. Now, when it comes to the documentation or evidence side of the equation, when it comes to things like entertainment, gifting, and the tax deductibility of it, what kind of documentation should business owners and companies be ensuring that they keep on hand?

Thanneermalai:
Very simple. In terms of whatever receipts, whether you're getting it from an expensive restaurant where you pay RM3,000 or RM5,000 for dinner or lunch, what you've got to do is make it a discipline: write on the receipt what that entertainment was, who attended the entertainment. Say, for example, "I entertained Mr. Roshan, my client. I have spent RM500 at lunch." You should put your name on the line and keep it there.

The other thing is when you're transferring money to people as gifts. Now you've got to get better in writing, saying that if you want to really gift it and that person should not be taxed, you're making a genuine gift. Let's say I give RM30,000 to someone. I have to write a letter to him or write an email to him saying that I am giving it to you as a gift for your kindness and for your friendship. So it's actually a reflection of my friendship. Put it in writing to them on such and such a date, sign it, and if the recipient can also acknowledge it, keep it in the file. Because three years later or five years later, you cannot find that information, and then they're going to say, where is the evidence of what you've done?

Also, if you transfer money from one bank account to another bank account, which I'm having issues with at the moment, the tax authorities often ask to see the bank entry. So that's another thing that you need to keep a record of.

Also, you must be in a position to be prepared: the person who is donating should be able to prove that he has the capacity—it is legitimate money, it is not something that otherwise he will be taxed on, saying, how did you get this RM1 million to give? He has to be in a position at the time of gifting to show that it is money that has been either taxed or money that is not taxed legitimately—for example, capital gains he's made in earlier years, or he has received a gift from somebody else. He must have the source of funds before he gives it. So that too, he should keep a record of.

I know it's additional paperwork, but unfortunately, the bureaucrats are asking the question. Otherwise, they will just turn around and say, the burden of proof is on the taxpayer. Otherwise, I'll treat it as income. It's very simple for them to turn around and say the burden of proof is on you. So it's better at the time that transaction is undertaken: on a receipt, write down who it was. If it was a bank transfer, write down and get some kind of email or WhatsApp message, print it, and keep it. So three years later, you know exactly when, how, and who was involved in the transaction.

Roshan Kanesan:
And this again comes back to gifting, entertainment expenses, all that sort of thing, which is the main topic of today—festive gifting and seasonality. As you mentioned earlier, intent does matter. Could you remind us again?

Thanneermalai:
Intent is very simple. You are actually intending to give a gift to somebody without an expectation of something to be returned to you. This is not a transaction, this is not a trade transaction: "I sell you something, you pay me back; I give you something, you give me something back." No, this is not barter trading, this is not a trading transaction. This is purely gratuitous, purely done on a personal level.

If you do that, you've got to get that recorded by making sure nowadays you send an email or WhatsApp or something and just record it. Both parties put that, and since it's a third party, get the IC number and record it. There's no necessity to stamp the document; you just keep it in your files.

Roshan Kanesan:
So that's on the evidence and documentation portion behind whether you paid for dinner or sent money as a gift. Do small businesses and large corporations face the same level of scrutiny when it comes to this kind of spending, Thannee?

Thanneermalai:
Absolutely the same. That's one of the first things when they come in for an audit, they will glance at it. When they look at the general ledger, they will look at the kind of expenses. Because the suspicion is: are you using the entertainment account to siphon money out? Is this accounting where you're saying, "I'm gifting, I'm gifting, I'm gifting," actually a means for you to take out the money as cash, and then you use it for bribing people? It's not something that is uncommon. So these are common techniques that people use, and the authorities know it.

When they come in for an audit, they will be looking at your entertainment account and various accounts: is there regular money going out? If you track it and see that the money has been taken out of the company bank account, then where did this money go? So it's not just for tax purposes, you've got to be careful when it comes to large bills. MACC is now very good at tracking it, Bank Negara is tracking it, everyone is tracking it.

E-invoicing now is a fantastic information source for the tax authority to track those taxpayers who think they've escaped tax. It's amazing what information is available and how they can use it. So gifts is another area they will be looking at. If you're receiving gifts or giving gifts, they'll say, "Let me have a look at why this person or this company is regularly gifting and receiving gifts." It's suspicious.

Roshan Kanesan:
Now, we come to the close of our conversation today. We've covered a lot of things, and with all things tax, there are always changes or clarifications that can possibly be made to make the rules easier. Is there anything top of mind for you when it comes to this?

Thanneermalai:
I think the majority of us, when we give gifts and receive gifts, are very honest people—95% to 98% of us are honest. 2% are not honest. But unfortunately, because of them, we get into trouble.

My final word to taxpayers is, whenever you're dealing with gifts or anything else, honesty is the best policy. Because if you're honest, you can defend it with your heart and soul with documents. This is how I deal with the authorities: be honest, give them the necessary information. Even if you don't have all the information, because you're honest right from the start and tell them exactly what happened, I find whether it's IRB, Customs, or the Ministry of Finance, they start believing you. You build an element of trust, and then dealing with the authorities is so much easier.

It all comes back to documents, the statements you make, and being honest. If you're not honest, that's when you get into trouble, because you cannot keep having one lie after another lie after another lie. Inevitably, the people who are now being trained are intelligent, and they have AI tools and super tools now. Look at e-invoicing. It's now more than digitalising; they're actually using that information to bring out from the woodwork the fellas who have been hiding. And rightfully so, because you and I are paying the right amount of taxes and these guys are not paying the taxes. They ought to be brought out of the woodwork and taxed. That's my view.

Roshan Kanesan:
Thannee, it's always a pleasure speaking with you and getting your thoughts on these different perspectives. Today we were talking about festive gifting and the taxman ultimately, and this has been quite illuminating. Thank you so much for your time.