Learn how e-invoicing impacts Malaysia's petroleum sector. Discover the challenges, benefits, and key steps for compliance in this comprehensive guide.
The petroleum industry is a key contributor to Malaysia’s economy, making up about 9% of the annual GDP. This sector includes over 3,500 businesses, ranging from major international oil companies to local service providers. As part of Malaysia’s digital transformation, the petroleum industry is now expected to adopt e-invoicing under the Inland Revenue Board of Malaysia’s (IRBM) regulations.
Starting August 1st, 2024, petroleum companies with annual turnovers exceeding RM 100 million will be required to implement e-invoicing. While e-invoicing is already common in other sectors, its introduction to petroleum operations presents some unique challenges. In this blog, we’ll walk through what petroleum businesses need to know and how they can prepare.
E-invoicing isn’t just about switching from paper to digital. It’s part of a broader effort by the Malaysian government to increase transparency, improve tax compliance, and streamline the business process. By reducing paperwork and errors, e-invoicing can ultimately help businesses operate more efficiently.
However, petroleum operations are far more complex than most other industries. This is because the sector involves high transaction volumes, multiple stakeholders, and many different types of costs and agreements. From selling crude oil to handling joint production agreements, every step requires careful attention to detail.
For many industries, e-invoicing is a straightforward task. But for the petroleum sector, the complexity lies in the diversity of transactions and the way companies operate. Let’s look at some of the biggest challenges.
In petroleum operations, companies often work under Production Sharing Contracts (PSCs). These contracts involve both the government and private companies, with each party sharing the risks and rewards of oil and gas production. The involvement of various stakeholders makes it tricky to determine which Tax Identification Number (TIN) to use when issuing an e-invoice.
For example, when a contractor sells crude oil to a buyer, they must use their contractor’s TIN, as required under the Income Tax Act 1967 (ITA 1967). Similarly, when handling costs related to joint production, the PSC operator’s TIN must be used for invoicing joint expenses, while sole costs are tied to the contractor's TIN.
Petroleum operations often involve costs shared among multiple companies. This includes expenses like drilling costs, production expenses, and joint operational costs. The challenge comes in ensuring that each company’s share is accurately represented in the e-invoice system.
For joint costs, the PSC operator is responsible for issuing the e-invoice, but when it comes to sole costs, the contractor must take charge. This division requires careful tracking and precision to ensure compliance with tax regulations and avoid disputes between partners.
Inter-ledger transactions, such as back charges between a PSC and its operator, are another challenge. These transactions happen frequently in the petroleum sector, yet they don’t always fit neatly into the typical invoicing process. Because of this complexity, the IRBM has temporarily exempted inter-ledger transactions from e-invoicing requirements.
Another common scenario is when a contractor sells petroleum products via an agent. In this case, the contractor must issue an e-invoice to the agent, and then the agent issues an e-invoice to the final buyer. This additional layer complicates the invoicing process and requires close coordination between all parties involved.
Similarly, supplementary payments — like base price increases on production anniversaries — need to be handled carefully. These adjustments are often addressed through debit notes or credit notes issued via the e-invoice system.
To comply with the new e-invoicing mandate, petroleum companies must take a proactive approach. Here are a few practical steps to get ready for the transition:
While the transition to e-invoicing might seem daunting at first, it offers several benefits for the petroleum industry:
As Malaysia transitions to e-invoicing, petroleum companies must be prepared to adapt. The complexities of the industry from handling multiple stakeholders to managing joint costs mean that companies need to pay close attention to the details. By understanding the challenges and taking the necessary steps, businesses can not only comply with the new regulations but also benefit from the efficiencies and transparency that e-invoicing offers.
