“Nuances” of paying personal income tax and VAT on entertainment expenses

To understand exactly what expenses can be classified as representative expenses, let us turn to clause 2 of Art. 264 Tax Code of the Russian Federation. It defines and provides an exhaustive (closed) list of entertainment expenses.

So, representative expenses include the taxpayer’s expenses for the official reception and (or) service of representatives of other organizations participating in negotiations in order to establish and (or) maintain mutual cooperation, as well as participants who arrived at meetings of the board of directors (board) or other governing body of the taxpayer , regardless of the location of these events. These are the costs for:

• holding an official reception (breakfast, lunch or other similar event) for these persons, as well as for officials of the taxpayer organization participating in the negotiations;
• transport support for the delivery of these persons to the venue of the representative event and (or) meeting of the governing body and back;
• buffet service during negotiations;
• payment for the services of translators who are not on the taxpayer’s staff to provide translation during entertainment events.

Representative expenses do not include expenses for organizing entertainment, recreation, prevention or treatment of diseases.

Attention!

The concept of entertainment expenses is used for tax purposes only. In accounting, entertainment expenses are taken into account as expenses for ordinary activities by debiting expense accounts 20, 26, 44 in correspondence with the accounts of the “Calculations” section (60, 71, 76). They are not standardized and are included in expenses in the amount of actual costs incurred.

Despite the detailed definition of entertainment expenses in the Tax Code of the Russian Federation, in practice questions arise when qualifying some expenses as entertainment expenses.

Let us consider in more detail the factors influencing the recognition of expenses as representative expenses.

Official reception and service

First of all, it is necessary to determine what exactly can be considered official reception and service; the Tax Code does not disclose these concepts. Therefore, only in accordance with the order of the manager, the meeting plan or other documents can it be proven that the meeting was of an official and business nature.

For example, a chance meeting between two executives and their dinner together will not be official. But if this meeting was planned, and certain funds were allocated for its holding by order of the manager, and after the meeting the manager presented a report on the negotiations held and the amounts spent, we can talk about an official meeting.

Should personal income tax be withheld from an event participant?

If an employee’s participation in representative events held by an organization is mandatory for him, then this participation is related to the employee’s performance of labor duties, and his income received in connection with participation in such an event is not subject to personal income tax.

note

The obligation of the employee to participate in ongoing entertainment events must be confirmed.

There must be, in particular, an order for the organization to hold the corresponding representative event, an approved list of employees taking part in it. The subject of negotiations is also important: issues that are such must correspond to the employee’s official responsibilities as provided for in his employment contract.

But if the company pays the employee’s expenses in his own interests, then their payment is considered the employee’s income received in kind. In this case, personal income tax must be withheld from the amount paid for expenses.

Place and time of negotiations

Tax authorities often try to refuse to recognize entertainment expenses due to the location of the negotiations. The disagreement here is caused by this: on the one hand, the Tax Code of the Russian Federation directly states that the location of entertainment events does not matter. But, at the same time, there is a restriction according to which expenses for organizing entertainment and recreation are not representative (paragraph 2, paragraph 2, article 264 of the Tax Code of the Russian Federation). Therefore, very often, according to inspectors, meetings in bars, cafes or restaurants are personal and unofficial.

However, in disputes of this kind, arbitration courts often side with taxpayers and recognize the legality of accounting for the costs of renting premises for a business meeting. If the organization has submitted documents indicating that it does not have premises suitable for receiving delegations of potential clients, conducting negotiations and concluding transactions.

The time for reception and negotiations of the Tax Code of the Russian Federation is not limited. This means that, subject to other conditions, the concept of an official reception will also correspond to a dinner organized for representatives of other organizations outside working hours.

If negotiations are unsuccessful

During inspections, the tax authorities require, in order to justify representation expenses, to submit some document indicating a positive result of negotiations: an agreement, a protocol of intent, etc. And if there are no such documents, then the tax authorities believe that the entertainment expenses are unreasonable.

Meanwhile, the Tax Code of the Russian Federation does not put forward such conditions and does not in any way link the recognition of entertainment expenses with the positive result of the meeting.

If a business meeting does not bring the expected results, for example, a long-awaited contract for the organization is not signed, then, in our opinion, it is also possible to recognize expenses for profit tax purposes. After all, the goal of negotiations may simply be to establish good relations with partners. In addition, the Tax Code does not contain a direct requirement for positive results of the meeting.

To avoid disagreements with the tax authorities, it is advisable to draw up a report or protocol indicating that the issues were discussed, but no agreement was reached.

Transport

Paragraph 2 of Article 264 of the Tax Code of the Russian Federation establishes that entertainment expenses include transportation support for the delivery of officials participating in negotiations to the venue of the entertainment event and (or) meeting of the governing body and back.

This clause does not cover the payment of travel costs for negotiators from other cities or countries to the city in which the official event will take place. Based on this norm, entertainment expenses include payment for travel of arriving invited persons to the location of the official event, for example, from the location of the host organization or from the hotel.

Accommodation

As for living expenses for representatives of other organizations , fiscal experts believe that these expenses cannot be taken into account for profit tax purposes. This is due to the fact that, according to Article 264 of the Tax Code of the Russian Federation, a reception means exclusively breakfast, lunch or another similar event. Paying for guests' stay is beyond the scope of this concept. It is difficult to dispute this argument, but sometimes such attempts are successful.

Standard for entertainment expenses when calculating income tax

According to clause 2 of Article 264 of the Tax Code of the Russian Federation, entertainment expenses are accepted for tax accounting purposes as part of other expenses within 4% of labor costs incurred during the reporting (tax) period.

Since income and expenses when calculating taxable profit are taken into account on an accrual basis throughout the year, the accountant needs to recalculate the amount of expenses that fall within the standard on a monthly or quarterly basis.

Results

When sending an employee on a business trip to conclude an agreement with a counterparty or participate in events of other companies, only expenses for business meetings can be taken into account. In order to accept expenses for tax accounting, the employee is required to prepare an advance report, attaching a primary report to it. You also need to prepare an estimate of upcoming expenses, an order from the manager and a report on the event.

Read more about accounting for travel expenses in the article “We arrange and pay for business trips.”
You can find more complete information on the topic in ConsultantPlus. Free trial access to the system for 2 days.

Peculiarities of documenting hospitality expenses

In the absence of documentary evidence, these expenses are not taken into account for profit tax purposes, as they do not comply with the principles of recognition of expenses in accordance with clause 1 of Article 252 of the Tax Code of the Russian Federation. In relation to entertainment expenses, such documents may be:

• order (instruction) of the head of the organization on the implementation of expenses for these purposes;
• estimate of entertainment expenses;
• report on entertainment expenses for events held;
• other necessary information about the event, as well as the amount of expenses for entertainment purposes.

In this case, all expenses listed in the report must be confirmed by relevant primary documents:

• in the case of the acquisition of goods (services) for representative purposes by the accountable person, the supporting documents will be the primary documents issued to this person by the relevant organizations. For example, cash and sales receipts, acts of acceptance and transfer of goods (provision of services), etc., as well as an advance report on the use of imprest amounts;
• when concluding an agreement with a third-party organization (for example, with a public catering establishment), the contract with this organization, the act of performance of work (rendering services), an invoice, an invoice will serve as documentary evidence of the implementation of entertainment expenses. If translators who are not on the staff of the organization are involved, the costs are also confirmed by relevant contracts, certificates of completed work and other documents.

Representative events: what are we talking about?

Representation expenses are the costs of an organization for receiving and servicing representatives of other organizations participating in negotiations to establish and maintain cooperation, as well as participants arriving at meetings of the board of directors (board) of the organization.
A complete list of entertainment expenses is given in Article 264 of the Tax Code. According to this article, entertainment expenses include the following expenses:

• for holding an official reception (breakfast, lunch, dinner or other similar event) of representatives of other organizations;
• on transportation support for representatives of other organizations related to their delivery to the meeting venue and back;
• buffet service for persons participating in the meeting during negotiations;
• to pay for the services of translators who are not on staff of the organization.

This list is exhaustive. Therefore, the costs of organizing entertainment and recreation, paying for visas, as well as paying for the accommodation of negotiators are not entertainment expenses.

However, the specific composition of expenses for the official reception of the Tax Code of the Russian Federation is not regulated.

For example, the Ministry of Finance of Russia in letter dated January 22, 2019 No. 03-03-06/1/3120 noted that the list of food products purchased for an official reception (breakfast, lunch or other similar event) may include and alcoholic drinks.

To confirm the expenses for a hospitality event, you will need the following documents:

• order from the manager to hold a representative event. It must indicate the purpose of the event and the organization’s employees who should participate in it;
• cost estimate for the event, approved by the manager.

After each reception of a delegation, the person responsible for processing hospitality expenses should draw up a report. The report indicates the date and location of the reception, its program, invited persons, representatives of the organization participating in the reception, and the amount of entertainment expenses.

All primary documents confirming expenses - cash register receipts, sales receipts, purchasing acts, etc. are attached to the expense report.

To control the costs of receiving delegations, you can set limits on certain types of hospitality expenses. Approve the standards and list of persons responsible for the use of funds by order of the manager.

Order for expenses

If the costs of receiving counterparties arise infrequently, the manager can issue an order in relation to each event. The order, as a rule, reflects the essence of the event (negotiations, business meeting), the duration of the meeting, the participants of the meeting, the maximum amount of expenses, the person responsible for the event and the expenditure of allocated funds.

Sample estimate for hospitality

An estimate as a plan for upcoming expenses is one of the main documents that will help justify the expenses incurred for a representative event. Its form is not established . Therefore, taxpayers develop estimates themselves and approve them by order.

Typically, the estimate form contains the following information:

• the inscription “I approve” (the estimate is approved by the head or chairman of the commission, whose powers include making a decision on the validity and expediency of entertainment expenses);
• the name of the document itself;
• name of the proposed event;
• a tabular part in which the name of the upcoming expenses, the number of participants and the amount of expenses are indicated.

Further, from our website, using a direct link, you can get free estimates for entertainment expenses.

EXAMPLE OF ESTIMATE FOR REPRESENTATION COSTS