Peppol 4-Corner Model for e-Invoicing in Malaysia

E-invoicing in Malaysia officially commenced on August 1, 2024, mandating that large taxpayers with a turnover exceeding RM 100 million generate e-invoices. This initiative marks a significant step toward digitalization by standardizing invoicing. It helps eliminate manual invoicing errors, reduces fraud, and enhances overall business efficiency.

At the core of this transition is the Peppol 4-Corner Model, a standardized framework that facilitates the seamless exchange of electronic invoices across various platforms. In this blog, we will explore the key components of Malaysia’s e-invoicing system, the role of Peppol in ensuring standardization, and how the 4-Corner Model promotes secure and compliant invoicing.

E-Invoicing in Malaysia: What You Need to Know

Malaysia’s e-invoicing is an electronic document transmission process that automates the entire invoicing process, ensuring that transactions are efficiently recorded, validated, and transmitted in real-time between businesses and the Inland Revenue Board of Malaysia (IRBM) . E-invoicing reduces the reliance on paper-based systems, minimizes errors, and enhances overall tax compliance.

The process involves the creation of an electronic invoice in a standardized format, ensuring that it can be easily processed and validated. The e-invoice is transmitted securely from the supplier to the buyer via a secure network,  through the e-invoicing portal,  APIs with direct integration or through the Peppol network, which is becoming the preferred global standard for electronic document exchange.

API Model of e-Invoicing and Peppol 

In Malaysia, the Inland Revenue Board (IRBM) offers two primary e-invoicing mechanisms: the MyInvois Portal and the Application Programming Interface (API). The MyInvois Portal allows individual taxpayers to generate and submit e-invoices through a user-friendly online platform, suitable for smaller businesses with limited transaction volumes. In contrast, the API model caters to larger enterprises handling high volumes of transactions, enabling seamless integration with existing systems such as Enterprise Resource Planning (ERP) software.

By connecting with Peppol-compliant technology providers, businesses can ensure their e-invoices meet international standards, facilitating smoother cross-border transactions. This integration not only streamlines real-time invoice processing but also enhances compliance with local and global regulations, significantly improving efficiency and reducing errors in invoicing. 

What is Peppol ?

Peppol, short for Pan-European Public Procurement Online, is a set of standards and specifications designed to facilitate the seamless exchange of electronic documents, particularly e-invoices, between businesses and government entities across borders.

It enables organizations to streamline their invoicing processes and enhances interoperability among various systems used for electronic document exchange. By establishing common standards, Peppol reduces the complexities and inefficiencies often associated with cross-border invoicing.

How Peppol Works

1. Standards and Specifications: Peppol establishes standardized formats and protocols for electronic documents, primarily focusing on e-invoices.
2. Access Points: Each business must select an Access Point provider, which acts as the gateway for sending and receiving documents.
3. Document Transmission: When a business generates an e-invoice, it is sent from its Access Point. The document is checked to ensure it meets Peppol standards and protocols.
4. Validation: The Access Point conducts validation checks to confirm that the invoice complies with the necessary formats and requirements before transmission. Once validated, the invoice is securely forwarded to the recipient’s Access Point.
5. Interoperability: The Peppol framework enables seamless communication between different systems, allowing organizations in Malaysia and various countries.
6. Real-Time Processing: The standardized nature of Peppol facilitates quick processing of invoices, reducing delays and improving cash flow management for businesses.

Peppol 4-Corner Model

The Peppol 4-Corner Model is a secure framework designed to facilitate seamless and standardized electronic document exchanges between businesses. The model is part of the Pan-European Public Procurement On-Line (Peppol) network, initially developed to streamline cross-border public procurement in Europe but now widely adopted globally, including Malaysia.

The model is referred to as "4-Corner" because it involves four key participants in the e-invoicing process:

1. Corner 1: Supplier (Sender) – The business generating and sending the invoice.
2. Corner 2: Supplier’s Access Point (Service Provider) – The service provider that converts the invoice into a standardized format compliant with Peppol.
3. Corner 3: Buyer’s Access Point (Service Provider) – The service provider that converts the received invoice into a format compatible with the buyer's system.
4. Corner 4: Buyer (Receiver) – The business receiving and processing the invoice.

However, the data is validated through the IRBM’s MyInvois System, which is connected to the Peppol network or a business system that handles the validation process.

How the Peppol 4-Corner Model Works

To understand how the Peppol 4-Corner Model facilitates e-invoicing in Malaysia, let’s break down the process step-by-step:

1. Invoice Creation (Corner 1): The supplier generates an electronic invoice through their ERP system or accounting software.
2. Standardization by Supplier’s Access Point (Corner 2):The supplier’s chosen Peppol Access Point (AP) converts the invoice into a standardized Peppol format to ensure compliance with both international and local (Malaysian) e-invoicing regulations.
3. Transmission to Buyer’s Access Point (Corner 3): The supplier’s Access Point securely transmits the standardized invoice to the buyer’s Access Point through the Peppol network. The document is encrypted and validated for accuracy at each stage.
4. Invoice Processing by the Buyer (Corner 4): The buyer’s Access Point converts the invoice into a format compatible with their internal ERP or accounting system. Upon receipt, the invoice is reviewed and processed for payment.

Practical Example of the 4-Corner Model

Let’s illustrate the Peppol 4-Corner Model with an example:

Scenario:
TechStyle Apparel, a clothing manufacturer in Kuala Lumpur, sells a bulk order of athletic wear to the retail giant Zara in Penang.

1. TechStyle Apparel (Supplier) prepares an e-invoice using their ERP system and sends it to their chosen Access Point A.
2. Access Point A converts the invoice into the Peppol format and validates it according to Malaysia’s e-invoicing regulations.
3. Access Point B (Zara’s Access Point) receives the invoice, converts it back into a format compatible with Zara’s system, and transmits it securely.
4. Zara (Buyer) receives the invoice, processes it for payment, and archives the transaction for compliance and record-keeping purposes.

Benefits of the Peppol 4-Corner Model for E-Invoicing in Malaysia

Implementing the Peppol 4-Corner Model offers several benefits that make it a compelling choice for Malaysian businesses:

1. Centralized Information Repository: The SMP and SML components act as a directory that stores essential information about participants, ensuring efficient routing of invoices.
2. Standardization and Interoperability: Using the Peppol network ensures seamless interoperability between different systems, reducing friction in cross-border and domestic transactions. This standardization is vital for global expansion.
3. Scalability and Flexibility: The Peppol 4-Corner Model supports businesses of all sizes, allowing easy integration with existing ERP systems. The model is scalable, adapting to growing business needs.
4. Global Integration: The Peppol network enables businesses to engage in cross-border transactions efficiently, opening up international markets without the hassle of dealing with multiple invoicing standards.
5. Improved Transparency and Traceability: Each stage of the invoicing process is tracked and recorded, providing real-time transparency and traceability. This is crucial for audit trails and financial reporting.
6. Regulatory Compliance: Peppol ensures that invoices comply with Malaysian tax laws and that all required data is shared with regulatory authorities like MDEC and LHDN.
7. Process Automation: The Peppol 4-Corner Model automates various stages of invoicing, reducing manual errors and expediting administrative tasks, leading to faster processing times.

Conclusion

The Peppol 4-Corner Model represents the future of e-invoicing, not just in Malaysia but globally. Its ability to streamline, standardize, and secure invoicing processes makes it an essential tool for businesses looking to optimize their operations, ensure compliance, and compete in an increasingly digital world.