e-Invoicing and the Future of Tax Audits

The aim of this initiative by the Inland Revenue Board of Malaysia (IRBM) is to streamline business transactions and improve tax compliance which in turn diminishes and over the longer run eliminates tax avoidance and leakages and the shadow economy. e-Invoicing is used as a means to optimize tax administration and to close the gaps in tax declarations in order to ensure everyone pays their fair share of taxes.

Businesses are encouraged to adopt to e-Invoicing as it improves accuracy, enhances efficiency, and reduces costs associated with paper-based invoicing. By the beginning of the third-quarter of 2025, Malaysia will see the full implementation of e-Invoicing.

The diagram below shows the implementation timeline by phases according to the taxpayers’ revenue threshold:

With e-Invoicing, businesses are required to comply with certain guidelines and it varies according to transactions and across various industry sectors.

A summary of the available guidelines and Frequently Asked Questions (FAQs) by the IRBM providing step-by-step guidance are as follows:

The Onus on Businesses

The given comprehensive and detailed guidance above indicates that it is now the responsibility of businesses to ensure the authenticity, integrity, and readability of their e-Invoices. In light of this, businesses would need to exercise care in ensuring the proper implementation of e-Invoicing as it may be complicated depending on the complexity and volume of businesses' transactions. There is no one-size-fits-all approach for businesses when it comes to e-Invoicing as transaction scenarios and parties varies accordingly and the treatment for one business may not be the same with another.

Considerations for Pre-Implementation

For businesses that are yet to implement e-Invoicing, below are some consideration points for the planning and smooth implementation of e-Invoicing:

Therefore, businesses should ensure that proper and early measures are taken for the preparation of e-Invoicing as the implementation process may be lengthy depending on the nature and complexity of businesses. Businesses should undergo thorough and careful planning to stay compliant.

Suggestions for Post-Implementation

Notwithstanding the challenges encountered by businesses during the implementation stage, challenges also present in post-implementing e-Invoicing.

The diagram below summarizes the challenges that arises during the post-implementation stage:

Consequences of Non-Compliance

Businesses should devote additional time during the early stages of e-Invoicing to continuously monitor for any improvement of processes and potential non-compliance areas, and to take necessary actions to correct while it is still early. It is essential and necessary for businesses to fully and accurately comply with the e-Invoicing guidelines as the consequences of non-compliance could present to be hefty on businesses as follows:

“Failure to issue e-Invoice is an offence under Section 120(1)(d) of the Income Tax Act 1967 and will result in a fine of not less that RM200 and not more than RM20,000 or imprisonment not exceeding 6 months or both, for each non-compliance.”

Businesses should be aware that the penalty is imposed for each non-compliance, hence multiple instances of non-compliance would lead the penalties to be multiplied manyfold. Therefore, businesses should not turn a blind eye or neglect the compliance requirements of e-Invoicing as the foremost reason it is mandatorily being implemented is to mitigate tax evasion and ensuring efficient revenue collection.

Tax Audits Through e-Invoicing

The structure of the e-Invoicing model allows it to capture real-time or near real-time data for each and every transaction, thus preparing a readily available database that allows the tax authority to look on at anytime and anywhere without now having the need to request and wait for documentations and information from taxpayers. Hence, a massive reduction on the lead time to obtain information and for audit processes. This immediate access allows quicker scrutinization and identification of abnormal, peculiar and irregular transactions or even potential frauds, as it provides a clear audit trail with improved traceability.

Therefore, alongside the implementation of e-Invoicing, it is foreseen that tax audits will increase in times to come. This is due to the tax authority now possessing an automated data collection and processing system which directly collects invoices data hence having detailed information on transactions, and subsequently aggregating the data across multiple transactions, sectors, and businesses, to create a comprehensive view of economic activities.

The tax authority will then be able to analyze the data and perform risk assessments through the following methods:

Based on their analyzed data, irregular patterns, high-risk scores and compliance discrepancies can automatically trigger a tax audit. Instances where significant under-reporting of income as compared to e-Invoicing data, exceeding certain thresholds (e.g., transaction volume, or value of exports or imports) without corresponding tax declarations, and when a business’s activities deviate significantly from the industry’s benchmarks, these occurrences raise red flags for the tax authority to scrutinize further.

Once the tax authority has commenced audit, they may request for additional documentations to verify the accuracy of the e-Invoicing data. In some instances, they may carry out field audits which are on-site visits to business premises for confirmation of business operations whether in line with the data provided through e-Invoicing and to inspect records. The tax authority may even perform data matching with third-party information to further validate the records.

Should there be discrepancies, measures will be taken by the tax authority for collection of unpaid taxes together with imposition of penalties. Businesses would be liable under Subsection 113(2) of the Income Tax Act 1967 (ITA 1967) for submission of incorrect tax return, or if the taxpayer had failed to furnish the tax return, a penalty under Subsection 112(3) of the ITA 1967. Furthermore, if the taxpayer were found not complying with the e-Invoicing requirements at the same juncture, the taxpayer would be imposed with additional penalties under Section 120(1)(d) of the ITA 1967.

Where in cases of fraud or severe non-compliance, legal actions may be initiated. However, the process does not end here as the tax authority will be continuously monitoring the business by conducting post-audit surveillances and keeping the business under closer scrutiny to closely monitoring their e-Invoicing data to prevent future non-compliance.

Thus, it is important for businesses to ensure they are aware of e-Invoicing compliance requirements as the onus lies on businesses and it is crucial for businesses to ensure adherence with the guidelines to reduce the likelihood of a potential non-compliance that could trigger a tax audit and the repercussions that arises thereof.

e-Invoicing Globally

In near time, e-Invoicing will be inevitable as it is not only evolving rapidly in Malaysia, but also worldwide as governments are increasing the mandate on e-Invoicing, and this trend is expected to continue leading to near-universal adoption.

Nevertheless, there is no universal model for e-Invoicing to be conformed to by countries. Therefore, countries have taken on their respective approaches whereby adjusting their e-Invoicing models to satisfy their distinct economic, regulatory, and technological needs.

The summary below shows the comparison of e-Invoicing models among regions:

Note: The Post-Audit model is one in which the invoices are sent directly from the supplier to the buyer without requiring the validation of the tax authority. On the other hand, the Clearance model requires validation of the tax authority before the invoices are sent to the buyer (akin with the underlying principal of Malaysia’s model).

Delving into the e-Invoicing models of several countries across the regions, the table below summarizes the distinct characteristics of their models:

Adaptation to e-Invoicing in Malaysia

Though a challenge, our Malaysian businesses should use this circumstance as a stepping stone towards digitalization as the digital revolution has changed the way our tax administration presently operates and to be operated in the future. Adopting to e-Invoicing not only achieves better tax compliance, but rather it brings other advantages for businesses in the long term such as increased efficiency, sustainability and integration in business processes. Our tax authority presently allows taxpayers to continue claiming for tax deductions without an e-Invoice, that is using existing documentations, however it has been made clear that this authorization is only limited until such time that the legislation is amended. This undoubtedly indicates that in near time e-Invoices will be compulsory for tax deduction purposes and one would be denied a deduction should there be no e-Invoices. With this pace, e-Invoicing is set to be an indispensable tool for modern businesses in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Pugaleshwaran Rajakumaran is a tax consultant and licensed tax agent who has a wide range of experience in Malaysian taxation. He is a passionate writer who actively writes on the development of Malaysian taxation scene.