How to implement LHDN E-Invoicing for Petroleum Industries
Learn how e-invoicing impacts Malaysia's petroleum sector. Discover the challenges, benefits, and key steps for compliance in this comprehensive guide.
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How to implement LHDN E-Invoicing for Petroleum Industries
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.
Why e-invoicing is Essential for Malaysia's Petroleum Sector in 2024
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.
What Makes e-invoicing Complex for Petroleum Operations?
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.
1. Multiple Parties and Contracts
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.
2. Complex Cost Structures
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.
3. Handling Inter-Ledger Transactions
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.
4. Dealing with Agents and Supplementary Payments
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.
Overcoming the Challenges: What Petroleum Companies Should Do
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:
- Review Your Contracts: Understanding your Production Sharing Contracts and the role of each party is crucial. Knowing who is responsible for costs and revenue will help ensure that the correct TIN is used in your e-invoices.
- Set Up a Robust System: Since the petroleum industry deals with complex transactions, investing in an efficient e-invoicing system is key. Ensure that your system can handle multiple parties, various contract types, and different types of transactions like supplementary payments.
- Train Your Team: Make sure that your finance and accounting teams are fully aware of the e-invoicing requirements. They should understand the nuances of handling different TINs, joint costs, and transactions involving agents.
- Monitor Regulatory Updates: As the IRBM continues to refine the e-invoicing system, new guidelines may be introduced. Keep a close watch on these updates to stay compliant and avoid penalties.
Benefits of E-Invoicing for Petroleum Operations
While the transition to e-invoicing might seem daunting at first, it offers several benefits for the petroleum industry:
- Improved Accuracy: With digital invoices, there’s less room for human error, ensuring that all transactions are properly recorded and reported.
- Faster Processing: Digital invoices can be processed much more quickly than paper ones, speeding up the time it takes to complete financial transactions.
- Better Compliance: E-invoicing makes it easier to comply with tax regulations and reduces the risk of penalties due to inaccurate or incomplete records.
- Increased Transparency: The system provides clear visibility into every transaction, improving accountability and making audits easier.
Conclusion: e-invoicing as a Game-Changer for Petroleum Companies
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.
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About the Author
Ajith Kumar
Im a skilled content writer and SEO expert crafting engaging articles that rank. Passionate about making complex topics clear, discoverable, and valuable to readers.Dedicated to driving organic growth through high-quality, search-optimized content
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