The laws about tax deductibility vary widely from country to country. In the United States, the 1986 Tax Reform Act changed the law as it relates to the deductibility of expenses for attending foreign conventions. The law prohibits attendees at business-related conventions held outside the “North American area” from deducting any expenses unless they can prove that it was “as reasonable for the meeting to be held outside the North American area as within the North American area.
Since the passage of the statute, the “North American area” has been expanded by treaties and trade agreements and now includes most of the countries in the Caribbean.
If a meeting is held outside of the North American area, the Internal Revenue Service applies a four-pronged test to determine if the deduction meets the “reasonableness” test:
- The purpose of the meeting and the activities taking place at it;
- The purposes and activities of the sponsoring organization;
- The residences of the active members of the organization (i.e., are any active members residing in the country of the meeting) and the locations of previous and future meetings; and
- “Such other relevant factors as the taxpayer may present.”
When planning a convention outside the North American area, select a destination where active members reside (if you are planning an association meeting) or where there are educational or research facilities known for their expertise in the trade or profession of the attendees. Or choose a location with a significant number of persons or companies engaged in the same trade or business as the attendees. Persons from the host country should be made part of the program and promotional material should emphasize that the primary purpose of the meeting is for the U.S. attendees to take advantage of the educational opportunities offered by the host country. If these steps are taken, attendees should be able to deduct expenses.
Problems arise when meetings are held in locations outside the North American area where there are no members, no persons engaged in the same trade or business as the attendees, no educational facilities, and the only real reason for the visit is to enjoy the exotic location.
The recipient of a pure incentive trip — one where the trip is being taken primarily for pleasure — is responsible for paying taxes on the fair market value of that trip (the cost of airfare, hotel, ground transportation, etc.). Some companies award a cash bonus to help offset the taxes that will be owed by the recipient.
Planners who routinely organize meetings outside their home country will be familiar with the tax deduction rules that apply. For novices, a visit to a tax specialist for advice, at the early stages of planning, is a necessity. Even within the European Union, different rules apply.
James E. Anderson, Esq., specializes in representing trade associations and nonprofit groups with the law offices of Howe, Anderson & Steyer, P.C., in Washington, D.C.