REVENUE REGULATIONS NO.

10-2002 issued on July 18, 2002 imposes a ceiling

on the amount of entertainment, amusement and recreational expenses claimed by the
following taxpayers: 1) individuals engaged in business, including taxable estates and
trusts; 2) individuals engaged in practice of profession; 3) domestic corporations; 4)
resident foreign corporations; and 5) general professional partnerships, including its
members.
The term “entertainment, amusement and recreation expenses” includes
representation expenses and/or depreciation or rental expense relating to entertainment
facilities, as described in the Regulations.
The following expenses are not considered entertainment, amusement and
recreational expenses: 1) expenses treated as compensation or fringe benefits for services
rendered under an employer-employee relationship; 2) expenses for charitable or fund-
raising events; 3) expenses for bonafide business meeting of stockholders, partners or
directors; 4) expenses for attending or sponsoring an employee to a business league or
professional organization meeting; 5) expenses for events organized for promotion,
marketing and advertising; and 6) other expenses of similar nature.
The requisites for the deductibility of said expenses, subject to the ceiling
prescribed, are specified in the Regulations.
There shall be allowed a deduction from gross income an amount equivalent to
the actual entertainment, amusement and recreation expense paid or incurred within the
taxable year by the taxpayer, but in no case shall such deduction exceed 0.50 % of net
sales for taxpayers engaged in sale of goods or properties; or 1% of net revenue for
taxpayers engaged in sale of services, including exercise of profession and use or lease of
properties.
If a taxpayer derives income from both sale of goods/properties and services, the
allowable entertainment, amusement and recreation expense shall in all cases be
determined based on an apportionment formula, taking into consideration the percentage
of the net sales/net revenue to the total net sales/net revenue, but which in no case shall
exceed the maximum percentage ceiling provided in the Regulations.
The claimed expense shall be subject to verification and audit for purposes of
determining its deductibility as well as compliance with the substantiation requirements,
as provided in the Regulations. If after verification, a taxpayer is found to have shifted
the amount of the entertainment, amusement and recreation expense to any other expense
in order to avoid being subjected to the prescribed ceiling, the amount shifted shall be
disallowed in its totality, without prejudice to such penalties as may be imposed by the
Tax Code of 1997.
The ceiling provided on the Regulations shall apply only to entertainment,
amusement and recreation expenses paid or incurred beginning September 1, 2002,
regardless of the taxpayer’s accounting period.