From Andrew Ewe
The introduction of Malaysia’s e-invoicing system by the Inland Revenue Board (LHDN) represents a significant change in the way taxpayers must record their commercial activities.
Starting from 2024 with a gradual rollout, e-invoicing is considered the backbone of an updated tax management framework. This new approach aims for greater openness, trackability, and decreased tax evasion.
Nevertheless, as administration efforts advance, a significant misunderstanding is emerging amongst taxpayers, trainers, and professionals: the notion that possessing an authenticated e-invoice inherently ensures a tax deduction.
This belief is not just incorrect; it could be perilous. Companies depending exclusively on e-invoices for evidence of deductions might discover their position precarious when confronted with scrutiny during tax audits.
The function of the e-invoice guidelines: supportive, yet non-binding
The LHDN has performed admirably by releasing e-invoice guidelines along with comprehensive FAQs to clarify how e-invoicing works. While these resources are beneficial, they do not establish the legal framework required for tax deductions.
Administrative guidance lacks legal enforceability. Although Section 82C was newly added to the Income Tax Act (ITA) requiring electronic invoicing under specified conditions, Sections 33 and 39—key sections dictating the deductibility of expenses—have not undergone any amendments.
To put it briefly, a compliant e-invoice does not automatically qualify as a deductible expense – at least not yet.
The genuine legal criteria for claiming deductions
The allowable deduction for expenses still hinges on Section 33(1). This section mandates that any expenditure being claimed should be "entirely and solely incurred in generating gross income".
Furthermore, Section 39 enumerates expenditures that are strictly forbidden, including capital spending, personal costs, or payments for fines and penalties.
These provisions concentrate on the essence rather than the structure. Simply having a valid electronic invoice, regardless of how well-formatted or digitally authenticated it may be, does not exempt the necessity that the expenditure must be made for business-related reasons.
It cannot overrule statutory bans outlined in Section 39.
This difference is important. Take, for instance, a situation where a company director gets a legitimate electronic invoice for an expensive wristwatch bought in the company’s name. However, this cost cannot be deducted unless it satisfies the business necessity criteria outlined in Section 33—and isn’t barred according to Section 39.
The two aspects of deducibility: documentation and essence
The present discussion fails to acknowledge that tax deductibility rests on two foundations:
- Documentary evidence – The invoice or record, which might shortly need to adhere to the e-invoice format as mandated by law;
- Fundamental criterion – Legal standard: Is the cost related to business operations, entirely and solely incurred, and not explicitly prohibited?
E-invoices excel at enhancing traceability and documentation for the initial objective. However, they fail to substitute the subsequent requirement.
As tax experts understand, documentation marks the beginning of the process, rather than its conclusion.
A perilous presumption for both taxpayers and experts
The risk is in the unintentional message conveyed: that e-invoicing has become the new benchmark, with everything not adhering to it considered as non-compliant or non-deducible.
Not only does this risk penalizing conscientious taxpaying citizens when audited, but it could also create a misleading sense of safety among others.
If companies think that e-invoicing ensures deductions, they might begin to claim costs that have fundamental flaws – which could lead to increased audits down the line.
What should be done
Although it makes sense for companies to start getting ready for e-invoicing regulations, particularly as we approach mandatory stages, simply ticking off a list of online form submissions shouldn’t be considered true adherence.
Taxpayers should keep applying the guidelines set out in Section 33 and Section 39 when determining if an expense can be deducted.
Conclusion
E-invoicing represents a positive move towards updating tax compliance, yet we should avoid mistaking process improvements for fundamental rights. The legislation has consistently mandated that expenditures be substantiated not merely through documentation, but also by their intent and essence.
In the meantime, as long as the law does not specify differently, taxpayers can relax knowing that costs backed by conventional invoices and receipts can still be claimed. This holds true as long as these expenditures comply with the legal conditions outlined in Sections 33 and 39 of the Income Tax Act 1967.
To think differently would be falling into the trap of deducibility as an illusion.
Andrew Ewe is a Fellow of the Chartered Tax Institute of Malaysia and previously served as the chairperson of its northern chapter.
The opinions stated belong to the author and may not represent the stance of FMT.