Implementation of e-invoice in Malaysia for Petroleum Operations

The petroleum operations sector is crucial to Malaysia's economy, contributing approximately 9% to the annual GDP and involving over 3,500 businesses ranging from international oil companies to local service providers. 

The first phase of the e-invoicing mandate in Malaysia also covers petroleum companies with annual turnovers exceeding RM 100 million starting 1st August 2024. However, adopting e-invoicing in petroleum operations is complex due to high transaction volumes, multiple stakeholders, and stringent regulatory requirements.

To assist petroleum firms in complying with these new requirements, the Inland Revenue Board of Malaysia (IRBM) has released specific FAQs addressing the challenges and clarifications related to e-invoicing in the petroleum operations sector. This blog will explore these FAQs in detail, providing clarity and additional insights where necessary.

Challenges in e-invoicing for Petroleum Operations

Challenges with e-invoicing for Petroleum Operations e-invoicing is complex for petroleum operations due to the industry's vast scale, high transaction volumes, and the involvement of multiple stakeholders across the supply chain. 

These processes must accommodate various contractual agreements, fluctuating market prices, and stringent regulatory requirements. Here are some of the major challenges

1. Complexity in Determining TIN
   • Determining the correct TIN for both suppliers and buyers in various scenarios, such as selling crude oil or handling joint and sole costs, poses significant challenges.
   • In Production Sharing Contracts (PSCs) within the same operational area (contiguous block), identifying the appropriate TIN for selling crude oil and managing operational costs is particularly complex.
2. Inter-ledger Transactions: Issuing e-invoices for inter-ledger transactions between PSCs and PSC operators, such as bank charges, presents operational hurdles.
3. Agent-mediated Sales: Managing the invoicing process when contractors sell crude oil through agents introduces substantial complexity.
4. Operator-issued Invoices: Allowing PSC operators to issue e-invoices on behalf of contractors under the Upstream Gas Sales Agreement complicates ensuring accurate representation of contractor details and validation within the MyInvois portal.
5. Supplementary Payments: Handling e-invoices for supplementary payments, like base price increases on production anniversaries, requires careful management.
6. Cash Call and Joint Interest Billing (JIB): It is crucial to ensure that settlement methods like cash call and JIB, which traditionally fall outside e-invoicing's scope, are properly excluded from e-invoice requirements.

FAQ on Petroleum Operations

What TIN should be used as the Supplier's TIN when a Production Sharing Contract (PSC) contractor sells crude oil to a buyer, and what corresponding details should be provided?

Since the transaction is between the contractor and the buyer, the contractor's TIN assigned for purposes under the Income Tax Act 1967 (ITA 1967) should be used as the Supplier’s TIN, along with the contractor’s details as the Supplier’s details, in the e-invoice. Contractors must also include the appropriate classification coding (as specified in the e-invoice data catalogue) to indicate that the transaction relates to petroleum operations as defined in the Petroleum (Income Tax) Act 1967.

A production sharing contract (PSC) is an agreement between a government and a petroleum exploration and production company. Under this contract, the company bears the exploration and production risks and costs in exchange for a share of the production (typically in the form of oil or gas) that arises from the contract area.

Which TIN should be used as the Buyer's TIN for expenses related to petroleum operations?

• (i) For joint costs: Use the PSC operator’s TIN assigned for ITA 1967 purposes.
• (ii) For sole costs: Use the contractor’s TIN assigned for ITA 1967 purposes since the expense is solely for that contractor.

The IRBM recognizes challenges in issuing e-invoices for recharging joint costs related to petroleum operations. Consequently, PSC operators and/or contractors are exempt from issuing e-invoices for such transactions until further notice.

When multiple PSCs are in the same operational area (i.e., contiguous block), which TIN should be used for the following: (i) The Supplier’s TIN when selling crude oil, (ii) the Buyer’s TIN for expenses related to petroleum operations

The following use of TIN are to be used for each case

• (i) The Supplier’s TIN when selling crude oil: Use the contractor’s TIN assigned for ITA 1967 purposes.
• (ii) The Buyer’s TIN for expenses related to petroleum operations: For joint costs, use the contiguous PSC operator’s TIN assigned for ITA 1967 purposes. For sole costs incurred by contractors of contiguous PSC, use the contractor’s TIN assigned for ITA 1967 purposes.

Is an e-invoice required for inter-ledger transactions between PSC and the PSC operator (e.g., back charges)?

The IRBM acknowledges challenges in issuing e-invoices for inter-ledger transactions related to petroleum operations between PSC and its operator. Therefore, e-invoices are exempt for these transactions until further notice.

What is the e-invoice procedure if PSC contractors sell crude oil through an agent?

The current invoicing arrangement applies upon e-invoice implementation. For instance, if a contractor sells the petroleum product to an agent who then sells it to the buyer, the contractor should issue an e-invoice to the agent, and the agent should issue an e-invoice to the buyer.

Can the PSC operator issue e-invoices on behalf of contractors under the Upstream Gas Sales Agreement once e-invoicing is implemented?

The PSC operator can issue an e-invoice on behalf of the contractor for the sale of gas under the Upstream Gas Sales Agreement, in line with the current invoicing arrangement. For e-invoice issuance, the contractor’s details should be used as the Supplier’s details. The e-invoice will appear in the respective contractor’s MyInvois portal upon validation and not in the Operator’s portal.

How should supplementary payments (e.g., base price increase on every production anniversary) be handled in e-invoicing?

The current invoicing arrangement will apply upon e-invoice implementation. Any true-up or true-down adjustments will be managed via issuing a debit note or credit note e-invoice.

Are cash call and joint interest billing (JIB) included in the e-invoice scope?

As cash call and JIB are methods for settlement, no e-invoice is required.

Cash Call:  A cash call refers to a request made by the operator (typically an oil company) to the non-operating partners (usually other companies or investors in a joint venture) to contribute their share of the costs associated with ongoing operations, such as drilling, exploration, development, and production activities. These contributions are often required in advance to fund the project's expenses.

Joint Interest Billing (JIB): Joint Interest Billing (JIB) refers to the process of billing and accounting for expenses incurred in a joint venture operation among the partners involved. It involves allocating and billing each partner for their proportionate share of expenses related to exploration, drilling, production, and other operational costs. JIB statements are typically prepared periodically (monthly or quarterly) to detail these expenses and ensure that each partner pays their fair share according to their ownership interest in the venture.

Conclusion

The FAQ provides essential guidance for implementing e-invoicing in Malaysia's petroleum operations, addressing challenges related to TIN usage, joint and sole cost transactions, inter-ledger transactions, and sales via agents.

By clarifying these key areas, the FAQ helps ensure compliance, streamline invoicing processes, and enhance transparency in financial transactions within the petroleum industry. This support is crucial for maintaining efficient and accurate accounting practices as Malaysia transitions to e-invoicing.