E-Invoicing for Reimbursement & Disbursement,
and Employment Perquisites & Benefits
As the wave of e-Invoicing is about to sweep through Malaysia in 3 phases beginning August 2024, we are committed to help business owners and managers in understanding this transformation better.
The Continuous Transaction Control (CTC) e-Invoice model to be adopted by Malaysia will ensure a comprehensive and standardised approach to generation, transmission, and recordkeeping of transaction documents. In a nutshell, the e-Invoices mainly function in two ways:
1. Proof of Income:
E-Invoice is issued whenever a sale or other transaction is made to recognise it as an income of the taxpayer; and
2. Proof of Expenses:
An invoice can be issued to document purchases made or other spending by taxpayers, for instance returns by customers, or discounts given to customers. It can also be used to correct or subtract the amount in a previously issued invoice.
Also, there are certain circumstances where taxpayers would have to issue Self-Billed e-Invoice to document an expense, such as payments to entities who are exempted from issuing e-Invoices in Malaysia (for example government agencies), or overseas supplier who is not part of the e-Invoice ecosystem of Malaysia.
Our ongoing series of articles have covered topics such as types of transactions, the 4 types of e-Invoice documents (Invoice, Credit Note, Debit Note, and Refund Note), and the intricate workflow of this groundbreaking system based on the Guideline issued by the Inland Revenue Board of Malaysia (LHDN).
In this instalment, we will deal with a few situations where the expenses might or might not be paid directly by the client, but are ultimately borne by the client: Reimbursement and Disbursement, as well as Employment Perquisites and Benefits.
Streamlining E-Invoicing for Reimbursements & Disbursements
The world of e-Invoicing might seem complicated, especially when it comes to transactions such as Reimbursements and Disbursements. But worry not, here’s a guide to navigate this terrain smoothly, ensuring accurate e-invoicing to ensure full compliance.
First, let’s break down the terms. Reimbursements and Disbursements both arise in the context where a service provider pays a third party supplier upfront while it trades with or serves a client, with an important difference between them:
Reimbursement: Where business expenses incurred by the service provider are paid by the service provider to the third party supplier upfront, to be compensated by the client later, such as travel cost or research cost.
Disbursement: Where project or material costs incurred by the client are paid by the service provider to the third party supplier upfront, to be compensated by the client later, such as decoration material or event venue rental.
To avoid complicating matters, we should always bear in mind the fundamentals:
For Disbursement (project or material cost incurred by the client)
– The third party supplier should invoice the client directly.
– Even if the service provider has paid the third party supplier upfront, it should not be included in the service provider’s e-Invoice to the client. He should just provide the proof of payment to obtain the Disbursement.
For Reimbursement (business expenses incurred by the service provider)
– The third party supplier should invoice the service provider.
– While invoicing the client for the sales, planning or consultation service, the service provider can list these business expenses in separate lines, to get it refunded by the client in the form of Reimbursement.
Essentially, each party invoices his actual customer, and only for their own contribution. Remember:
– Transparency is key: Ensure all e-invoices are clear and accurate, reflecting the individual services provided by each supplier.
– Keep your proofs handy: Maintain records of upfront payments, thus allowing for a smooth reconciliation later.
By following these steps, you can navigate the world of e-invoicing for reimbursements and disbursements with confidence. No more tangled webs of transactions, just a clear and efficient flow of information and funds.
Example: Reimbursement & Disbursement
1. Client: Dynamic Development Bhd. (property developer)
2. Service Provider: Excellent Events Sdn. Bhd. (event planner)
3. Third Party Supplier: Cosy Convention Centre (venue provider)
4. Third Party Supplier: Homely Hotel (accommodation provider)
Imagine this: Dynamic Development Bhd., a property developer is gearing up for a splendid product launch, planned by their designated event planner, Excellent Events Sdn. Bhd.
1. Disbursement (Project cost)
Cosy Convention Centre was chosen as the venue for the product launch. As per the agreement, the venue provider, Cosy Convention Centre issued an e-Invoice directly to the ultimate client, Dynamic Development for the space rental.
Now, here’s where things get interesting: as in common practice, the event planner acted as the main contractor in dealing with all the subcontractors. Hence, they paid the venue rental bill to the convention centre upfront on behalf of the client, Dynamic Development, ready to be reimbursed later.
2. Reimbursement (Service Provider’s business expenses)
To set the scene, Excellent Events assigned a team of 20 workers to work until late night. For the convenience of the workers, Excellent Events booked 10 rooms in the nearby Homely Hotel for the workers.
From the perspective of Homely Hotel, it did not matter who was the one engaging the Excellent Events workers for the setup. The hotel just issues an e-Invoice to Excellent Events directly. Again, Excellent Events settled the hotel bill first, understanding that it would be refunded by its client, Dynamic Development later.
3. E-Invoicing the Client
Upon the conclusion of the event, Excellent Events sent their own e-Invoice to Dynamic Development. The event planner’s e-Invoice should only reflect:
a. Their own work, including their planning service fee,
b. Their business expenses (workers’ hotel accommodation), listed on separate lines to be settled as Reimbursement.
Crucially, the venue rental which was invoiced to Dynamic Development, but paid upfront by the event planner is nowhere to be seen. Why? Because each party invoices separately for their services.
The venue rental is part of Dynamic Development’s project cost, which should be settled as a Disbursement. The event planner simply provides Dynamic Development with a copy of the payment proof, to obtain the Disbursement of venue rental later.
Handling E-Invoicing for Employment Perquisites & Benefits
Next, we turn our attention to yet another type of transactions – Employment Perquisites and Benefits. As certain payments conventionally borne by employers are momentarily fronted by employees, the e-Invoicing process set forth by LHDN brings clarity to this dynamic process.
Under a contract of service, employees may receive various benefits in cash or kind, sometimes offered through third party suppliers engaged by the employers. Such provisions cover a wide spectrum from monetary liabilities like utility bills to subscription to professional bodies, club memberships, gym subscriptions, and various allowances such as travel, petrol, tolls, parking, and meals.
Usually, employees pay these expenses first, and subsequently submit the claims to their employers, backed by supporting documents like bills, receipts, or statements. These claims are recorded as the employer’s expenses, crucial for lowering corporate tax liability.
With the upcoming implementation of e-Invoicing, expect to see slight changes on the handling of these expenses. Since the employers are the ones settling the bill ultimately, e-Invoices are supposed to be issued in their name.
However, recognising potential challenges in having e-Invoices issued directly in the employer’s name, LHDN is taking a more flexible approach, as long as the perquisites and benefits are clearly stipulated in the employer’s policy:
- For tax reporting, businesses are permitted to utilise e-Invoices issued in the name of employees too.
- If the supplier is based overseas and does not come under the e-Invoicing ecosystem of Malaysia, there is no need for the employer or employee to issue a self-billed e-Invoice as a proof of expenses. Instead, the foreign-issued receipts, bills or statements are accepted.
Example: Employment Perquisites & Benefits
Imagine this: Natalie is a professional engineer with Dynamic Development Bhd., and she is entitled to several employee benefits as per company policy. While those employee benefits are ultimately covered by the employer, she has to pay them upfront before claiming back. Recently, she has to settle the following payments:
1. Office Parking: The office is located in one of the latest landmarks in downtown, season parking is not cheap but luckily it is covered by the company. Just that Natalie signed up individually, therefore the e-Invoice is issued in her name.
2. Gym Membership: The company promotes work life balance, therefore it is sponsoring a gym membership for employees. Since Natalie participates under the corporate package, the e-Invoice is issued in the employer’s name. Nevertheless, she has to pay it first as usual.
3. Professional Body Subscription: As a professional engineer, Natalie is a corporate member of several local and foreign professional bodies, including the Institution of Engineering and Technology UK (IET), which she has joined since her college days. The subscription is charged to her name annually.
As explained in the E-Invoicing Guideline published by LHDN, bills and receipts for Employment Perquisites and Benefits are accepted whether they are issued in the name of employer or employee, as long as these Employment Perquisites and Benefits are clearly stipulated in the employer’s policy.
Therefore, Natalie can just submit her claim requests with these bills and receipts without extra hassle.
E-Invoicing Seamlessly & Confidently with IFCA Software
As the e-Invoicing era beckons, understanding these intricacies ensures a smooth transition, empowering both businesses and employees alike. E-Invoicing for Reimbursements & Disbursements, as well as Employment Perquisites and Benefits isn’t exactly rocket science! Stay tuned for more insights on navigating the digital frontier of your taxation compliance.