Exploring the Effects: How E-Invoicing Transforms Business Operations in Malaysia

With Malaysia's four-phase electronic invoicing initiative set to begin in August 2024, businesses should expect significant operational changes.

Electronic invoicing will streamline tax-related processes, making it easier for companies to make and receive payments.

The Inland Revenue Board of Malaysia (IRBM) is revolutionizing the tax administration by making it easier for businesses to transact and keep up with their taxes.

The IRBM allows two transmission mechanisms, allowing a seamless transition for large and small businesses. The e-invoicing system will also work for international transactions through the PEPPOL network.

This network is operational in over 60 countries, providing a wider market space for Malaysian businesses.

In this post, we’ll explore how the transition to mandatory e-invoicing will affect businesses and how to overcome the challenges they may face with integration.

Why is electronic invoicing implemented in Malaysia?

Electronic invoicing in Malaysia is set to strengthen digital services in tax administration. The main reasons the government is adopting mandatory electronic invoicing are:

Eliminating paper invoicing, which contributes significantly to tax leakages
Helping businesses minimize costs involved in invoicing and tax compliance
Enabling international trade by creating a wider market gap for Malaysian companies

How will e-invoicing transform business operations in Malaysia?

E-invoicing will offer businesses in Malaysia significant advantages that will help increase efficiency. They include:

Streamlines operations

Automating invoicing, especially for businesses using paper invoicing, will reduce tedious data entry tasks. However, this will mainly favor large businesses integrating an API system into their e-invoicing process.

Small businesses using IRBM’s MyInvois portal will still need to enter invoice data into the system manually. These businesses will still enjoy electronic invoicing, making managing invoices easy.

Automating e-invoicing processes will help all businesses, but some more than others. It will simplify creation, delivery, and processing to streamline business operations by reducing the time business owners spend processing an invoice.

Improves cash flow

Nationwide and international e-invoicing systems will accelerate payments since documents will reach their intended recipients quickly. Transacting companies and taxpayers will process and approve electronic invoices quickly.

With faster, automated payments, businesses will minimize calculation and billing errors that often bring up disputes.

They can swiftly access their revenue, improving cash flow and management. This helps reduce the need for loans and buying products and services on credit.

Digital transformation

Mandatory electronic invoicing will force businesses to adopt new technology to ensure compliance. This will allow business owners to purchase software and hardware to streamline electronic invoicing and other financial reporting processes.

Digital transformation will also help eliminate paper use, reducing operational costs significantly.

Improves supplier relationships

Using a common electronic invoicing system contributes to healthier supplier relationships by making transactions transparent. There are no hidden charges or costs that may cause conflict between transacting organizations.

Suppliers also find faster payments convenient, leading to frictionless transactions and fostering trust between taxpayers and suppliers.

Enables tax compliance

Some business owners in Malaysia operate without adequate knowledge regarding taxation. They may unintentionally fall behind in their taxes, leading to hefty fines or even jail time.

The IRBM will integrate the new system with the tax administration, making it easier for businesses to file their returns on time. This body will also monitor all transactions in real-time to ensure compliance.

Businesses whose invoices fail to comply with the set regulations will be rejected by the taxation body and sent back to the sender.

The Malaysian government has also allowed the Malaysian Digital Economy Corporation (MDEC) to approve reliable PEPPOL service providers in the country. These will also play a huge role in helping businesses remain compliant.

You may also: E-Invoicing in Malaysia: What Are the Compliance Standards and Tax Implications?

Authority responsible for overseeing e-invoicing in Malaysia

The Inland Revenue Board of Malaysia (IRBM) oversees the implementation process of e-invoicing in Malaysia. It is one of the main collecting agencies of the Malaysia Ministry of Finance.

The body was established in accordance with the Inland Revenue Board of Malaysia in 1995 to help improve the quality and effectiveness of tax administration.

Initially called the Department of Inland Revenue Malaysia, it was renamed the Inland Revenue Board of Malaysia (IRBM) in 1996 after becoming a formal board.

The IRBM is responsible for the following functions:

Acting as the government to provide various tax services such as administering, assessing, and enforcing income tax, petroleum income tax, stamp duties, and real estate property gains tax payments.
Advise the government on tax-related matters and liaise with the right ministries and statutory bodies.
Participating in tax-related purposes in or outside of Malaysia.
Act as a collection and recovery agent for anybody with dues under written law.

Timeline for the implementation of electronic invoicing in Malaysia

The e-invoicing implementation process will take place in phases starting in August 2024 and continuing until July 2025.

Let us discuss each phase in detail to understand the business category affected by each:

Phase 1

The first phase will target the largest companies in Malaysia with the most significant contribution to the economy. By 1 August 2024, any business with an annual turnover of RM100 million must adhere to the new e-invoicing mandate.

This transition will help large businesses to manage high-volume transactions and taxes efficiently.

Phase 2

The second phase will target businesses with annual revenue between RM 25 million and RM 100 million. These are mainly mid-size companies with less infrastructure than large organizations but still manage large volumes of transactions.

Phase 3

The final phase will include startups and other businesses with an annual turnover of less than RM 25 million. This phase will mainly force a digital transition in many small businesses that may still use paper invoicing.

Types of electronic invoices in Malaysia

Under the new Malaysian e-invoicing regulations, several documents must be issued electronically. They include:

Invoices

An electronic invoice is a document issued by the seller to a customer informing them that payment is due. With the new e-invoicing system in Malaysia, suppliers can send invoices that can be validated and approved almost instantly.

Credit notes

A seller issues a credit note to correct an electronic invoice that has already been issued. Credit notes help lower the value of the original invoice by adjusting errors, applying discounts, and accounting for returned items.

Debit notes

Debit notes work contrary to credit notes. They help record additional costs related to an electronic invoice that has already been issued.

Refund notes

A refund note records the reverse of a retail or commercial transaction. Business owners and suppliers issue refunds to account for the return of purchased goods or when services are unfulfilled.

Transactions covered under Malaysia's electronic invoicing system

The IRBM issued guidelines regarding the types of transactions for which electronic invoices must be issued. They include:

Business-to-business (B2B) transactions

B2B transactions occur between two businesses, such as manufacturers, retailers, service providers, and wholesalers.

For example, production companies purchase raw materials from manufacturers or IT firms that provide services to digital marketing agencies.

Business-to-consumer (B2C) transactions

B2C transactions are common in retail environments, service industries, and online shopping platforms. They involve the sale of goods or services directly to consumers.

Business-to-government (B2G) transactions

This transaction involves businesses that offer goods or services to government agencies. Examples include a construction company building public roads or an IT firm providing software solutions to the government.

The process flow of electronic invoicing in Malaysia

The Malaysian government has developed two methods of reporting invoices to help accommodate businesses of all sizes. The transmission process for the methods is almost similar, with a few slight differences.

Let us discuss the steps involved in issuing an electronic invoice in Malaysia.

Step 1: Creating an invoice

The main difference in e-invoicing in Malaysia is how issuers create and send an e-invoice to the IRBM. You can use the MyInvois portal, which requires you to enter the invoice information manually and send it directly to the IRBM.

The MyInvois portal is free and available to all taxpayers. Its friendly interface further enhances its usability.

Using the MyInvois portal may be tedious for businesses with large volumes of invoice data. However, these companies can use a third-party e-invoicing software API to generate invoices in XML or JSON format.

Most third-party software allows automatic data input and e-invoice generation. This allows businesses to issue many invoices quickly, enhancing business operations.

Step 2: Invoice validation

After generating the invoice, taxpayers must submit it to the IRBM for validation. The tax administration body checks the invoices and validates them in real-time.

The system ensures that every e-invoice meets the required standards, including that all the 53 mandatory entry fields have the appropriate information. It also ascertains the invoice’s structure and the taxpayer’s identification numbers.

After validation, the e-invoice is sent back to the buyer with a digital code, which is also sent to the recipient. If the IRBM rejects the invoice, it is returned to the issuer for correction.

To avoid the hassle of ensuring compliant invoices, business owners can use PEPPOL access point providers for seamless integration with mandatory invoicing.

Reliable PEPPOL service providers such as Storecove can help businesses ensure their invoices meet the required standards. They also offer businesses the chance to conduct international transactions.

Step 3: Attaching the digital signature

When the sender receives the invoice from the IRBM, they have to embed the code they receive for that invoice before forwarding it to the seller.

The recipient will have the code sent from the IRBM after validation with them. They can use it to verify the invoice sent to them by the seller.

The sender then shares the validated invoice with the recipient, including a visual code representation. This code helps them ascertain the invoice's existence and status in the IRBM system, which uses continuous transaction control (CTC).

Step 5: Rejection or cancellation

The buyer can optionally reject an invoice, while the supplier can cancel it within the 72-hour time limit, after which the invoice is considered valid.

If errors or corrections need to be made after the 72-hour limit, you can only use a credit, debit, or refund note.

Step 6: Transaction summary

After a transaction is complete, the buyer, seller, and tax administration can view the transaction summary in the country’s electronic invoicing portal, MyInvois.

Methods of reporting electronic invoicing in Malaysia

There are currently two methods of reporting electronic invoices in Malaysia, including:

MyInvois portal

The MyInvois portal is a free platform hosted by the IRBM and available to all Malaysian business owners.

This portal requires users to manually enter invoice data, which can be tedious, considering there are up to 53 fields that require data accuracy.

Despite the challenges posed by the platform, it is a reliable option for small and mid-sized businesses with minimal daily transactions.

It beats using an API, which requires software and hardware upgrades for maximum effectiveness.

Application Programming Interface (API)

Adopting API requires investment in technological modification to work with the current ERP system. Users can generate invoices in XML or JSON format using the API.

This method automates e-invoicing processes, making it easy for businesses to generate many invoices within a short period. It is ideal for large organizations with large volumes of transactions and cash flow.

Challenges faced by businesses in Malaysia with e-invoicing

Going digital comes with challenges like security, lack of funds for technological advancements, and resistance to change.

Let us discuss the main challenges businesses in Malaysia are likely to encounter during this transition:

Technical issues

The compatibility of newer, different systems and formats may force businesses to invest in software and hardware to enable integration. This can be quite costly and time-consuming.

Businesses must deal with various Malaysian e-invoicing standards, formats, and protocols during the transition. Some companies may find it difficult to adhere to the necessary technicalities, raising interoperability and compliance issues.

Regulatory compliance

Complying with new e-invoicing rules and requirements, such as authentication, validation, and storage, may prove difficult for business owners who are used to breaking a few tax laws.

The new e-invoicing system in Malaysia will ensure transparency and enhance tax-related activities. It will help bring those who are fond of evading taxes to justice.

Organizational and cultural resistance

Some internal or external business stakeholders may be hesitant or unwilling to adopt new e-invoicing methods. This may be due to a lack of awareness, trust, or the skills required for new systems.

Employees using paper-based processes and workflows often fear losing their jobs or control over their work. Some customers or suppliers may also be reluctant to adopt e-invoicing due to habit or convenience, which makes it difficult to transact.

Customer and supplier adoption

The e-invoicing system in Malaysia is only effective if buyers and sellers integrate it into their operations. Businesses must convince Malaysian taxpayers and suppliers to adopt the new system for maximum efficiency.

Those who fail to comply will be unable to conduct transactions and risk losing buyers who issue invoices through the IRBM system.

Cost and benefit analysis

Even though e-invoicing is meant to help businesses reduce business operation costs, integration requires upfront capital.

Businesses must weigh the costs of e-invoicing required, such as hardware, software, integration, and maintenance, against benefits, such as reduced paper, labor, errors, postage, fraud, and improved cash flow and business relationships.

The size, scale, and scope of business operations cause different return on investment (ROI) and break-even points for e-invoicing.

Organizations must conduct a realistic assessment of their invoicing need and compare various invoicing solutions, in this case, choosing between the MyInvois portal and Application Programming Interface (API).

Security and privacy risks

Sharing sensitive financial information using digital infrastructure poses various security and privacy risks.

Some of these challenges include unauthorized data access, modification, or disclosure. Businesses must also ensure they comply with data protection and regulation laws.

Critical financial information is often targeted through cyberattacks such as phishing, ransomware, or malware.

Therefore, businesses in Malaysia must find reliable e-invoicing solutions with robust security measures like encryption, backup, authentication, and recovery.

Best practices for implementing e-invoicing effectively in Malaysia

To overcome the challenges listed above, here are the best practices for businesses to implement e-invoicing for compliance:

Understand Malaysia’s mandatory e-invoicing regulations

The first step toward seamless integration of e-invoicing in Malaysia is familiarizing yourself with the set guidelines. Take ample time to understand the format, protocol, and other rules you must adhere to. You can also seek advice from a professional working in the IRBM.

Prepare for the e-invoice launch

Instead of waiting until the last day to prepare and launch your integration process, initiate the steps early to ensure seamless e-invoicing in Malaysia.

Decide which method of reporting e-invoices to use and take the necessary steps towards achieving it. There’s no crime in starting to use e-invoicing in the first implementation phase when you own a small business.

However, if you go past the deadline date, your business will suffer since you won’t be able to issue or receive compliant e-invoices.

Choose the right PEPPOL access point provider

Access point providers not only provide access to an international market but also help businesses ensure compliance. Partnering with a reputable partner like Storecove can help you send compliant invoices.

Takeaway: Revolutionize your business operations in Malaysia with mandatory electronic invoicing

The date for mandatory e-invoicing implementation is near. But how much progress have you made towards this transition, or are you waiting for the last-minute rush?

Adopting new technologies can be challenging, especially in the initial stages. However, the Malaysian government's initiative is advantageous not only to the tax administration but also to businesses.

Despite the initial capital required to enable implementation, businesses will enjoy faster payments, minimal paper use, and operational efficiency, among other advantages.

So, don’t be left out. Join the many companies adopting e-invoicing and using the PEPPOL network for international transactions.

At Storecove, we help businesses ensure compliance by adhering to Malaysia’s regulations. Contact us today to get started.

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