Case 16
<Question>
I often have lunch meetings with my clients and have drinks with them. Also, I am a member of the Canadian Chamber of Commerce in Japan so I sometimes join business parties held by the Chamber of Commerce. Regarding these expenses, is everything treated as an entertainment expense? Also, please give me any relative information regarding typical entertainment expenses.
<Answer>
Entertainment expenses include ordinary entertainment items, plus the cost of receptions, secret expenses and gifts to customers, etc.
The nature and magnitude of the amount expended by corporations in Japan for entertainment has become a social issue, also it makes it possible to transfer income from the corporation to the owner of the corporation; therefore, the tax authority puts restrictions on the recording of entertainment expenses.
Entertainment expenses deduction
1. Capital exceeding JPY 100 million
Not deductable.
2. Capital not exceeding JPY 100 million
(a) Expended entertainment expenses × 90％
(b) JPY 4 million × 90%
Smaller amount of either (a) or (b) is deductible.
Note: Under Income Tax, various forms of entertainment are included within the scope of the entertainment expense. As long as it is considered as an entertainment expense it is deductible.
Items excluded from entertainment expenses
The following are examples of items excluded from entertainment expenses, but a sensitive judgment is necessary when excluding or including these expenses.
- Expenditures for food and drinks less than JPY 5,000 per participant but not those made exclusively to entertain directors, employees. Also, it is necessary to record the corporate name and the names of any associated corporations or people.
- Expenses for the entertainment and recreation of company employees, including company recreational trips.
- Small items such as calendars, fans, etc given as gifts.
- Refreshments and luncheons at conferences.
- Costs of editorial meetings for gathering news stories by newspapers, magazines and broadcasters.
Q&A case
1. Lunch meeting
As mentioned above, refreshments and luncheons at conferences are excluded from the entertainment expense though please note that it should be a commonly accepted amount (even if it was over JPY 5,000, as long as it was considered commonly accepted it would be admitted).
2. Drinks with clients
As mentioned above, under some requirements, it is excluded from the entertainment expense. The points are that it should 1) be less than JPY 5,000 per participant 2) clarify the purpose, who with (generally it should be with customers). Also, the following points should be considered;
(1) In the case of entertaining a customer while drinking, if entertaining one customer is considered to be merely a formality it cannot be excluded from the entertainment expense.
(2) Regarding the second party, it is judged to be different to the first party basically, so as long
as it is less than JPY 5,000 it is excluded from the entertainment expense. However if the second party is considered as a continuation of the first party, it cannot be excluded from the entertainment expense. For example, the first party is held at a bar, and the second party is held at the restaurant of the bar.
3. Chamber of Commerce Party
If the party held by the Canadian Chamber of Commerce (not seminar, workshop or training) is fundamentally related to business it is considered as an entertainment expense. If not, it is considered as part of the salaries or bonuses of the people who join the party. Also, the membership expense of the chamber of commerce is excluded from the entertainment expense.
Conversely, the membership fee of a Rotary Club, Golf Club, or Leisure Club is considered as an entertainment expense (if it is not associated with other businesses, it is considered as part of the salary or yearly bonus).
4. Others
- Year end party or Christmas party
As long as every employee and officer participates in the party, it is considered as a welfare expense. If only a portion of the staff attended (such as officers only) it would be treated as salaries on condition that it is not related to business. If customers are invited, their expenses are included in the entertainment expense. - Congratulatory or Condolence payments
Basically, it is included in the entertainment expense. If it is paid to employees or officers, it might be considered as a welfare expense as long as it is a commonly accepted amount.
By Certified Public Accountant (CPA) & Tax accountant, Koji Takahashi,
Tokyo & Yokohama
