How E-Invoicing Will Impact Law Firms In Malaysia

As Malaysia advances its digital transformation agenda, the implementation of mandatory e-Invoicing by the Inland Revenue Board (LHDN) is set to reshape how businesses, including law firms, manage their billing and tax compliance. While this move aims to modernize the country’s tax ecosystem, legal practitioners must be prepared to navigate both operational and regulatory changes that come with it.

What Is e-Invoicing? E-Invoicing is a digital method of issuing, transmitting, and storing invoices in a standardized format regulated by the government. Under Malaysia’s e-Invoicing initiative, all invoices must be validated through the LHDN platform either directly (manually) or via approved accounting software. The phased rollout starts in August 2024 for businesses with an annual turnover exceeding RM100 million and will become mandatory for all taxpayers by July 2025.

How e-Invoicing Works?  The process begins when the business generates an electronic invoice for goods or services rendered. This invoice is created in a standardized digital format as per regulatory requirements.

The issued e-Invoice must be submitted to the relevant authority’s platform (e.g., LHDN in Malaysia) for validation. This ensures that the invoice complies with tax and legal standards before it can be considered official.

Upon successful validation, the system generates a notification confirming the status of the invoice. This provides both the supplier and the recipient with an acknowledgment of compliance.

Once validated, the e-Invoice is shared with the recipient. This could be sent directly through the platform, email, or integrated systems, depending on the setup between the parties involved.

If any issues are detected, such as incorrect information or failure to meet compliance standards, the e-Invoice may be rejected by the authority. In such cases, the supplier may need to amend or cancel the invoice and reissue a corrected version, ensuring that any amendments comply with the prescribed guidelines.

If changes are necessary after the invoice is validated (within a specified time frame), adjustments can be made using credit or debit notes. These changes must be processed within the stipulated time to ensure compliance.

Implications for Law Firms –  Law firms, like other service-based industries, are subject to this mandate. Each invoice issued must be submitted for validation through the MyInvois Portal or an integrated system. Firms must also ensure their billing practices and internal policies align with the new requirements.

Law firms that rely on traditional invoicing or manual systems will need to adopt e-Invoicing compliant accounting software or integrate their practice management tools with LHDN’s platform. This shift may involve additional costs and and require coordination with IT service providers.

Invoices must undergo real-time validation before being deemed official. Any delay in the validation process may disrupt cash flow and client billing cycles, particularly for firms that depend on timely payments to manage operational expenses and payroll. Once validated, each invoice will include a QR code, enabling clients to independently verify the submitted details for accuracy and compliance.

E-Invoicing enhances transparency and simplifies tax audits by creating an easily traceable digital record of all transactions. Law firms must maintain accurate, up-to-date records to avoid discrepancies that could result in penalties or tax audits.

Given the sensitive nature of legal services, e-Invoicing raises legitimate privacy concerns. Firms must ensure that client details included in invoices are handled securely, in accordance with professional conduct rules and data protection laws. Firms are advised to put a simple description of service in the invoice to protect the privacy of the client UNLESS the software system of the firm is able to separate the invoice into disbursement (exclude SST) and reimbursement (include SST).

Staff involved in billing and accounts will need to be trained on the new e-Invoicing process, including handling errors, cancellations, or corrections. Clear internal protocols will be essential to maintain accuracy and compliance. Any adjustments to an e-Invoice must be made within 72 hours of its validation. If changes are required after this period, the firms are obligated to amend the original transaction by issuing a credit note. This requirement applies to amendments initiated by the firms as well as those arising from the client’s rejections.

Conclusion. The implementation of e-Invoicing is more than a technical upgrade. it is a strategic shift that affects the operational core of law firms. By planning ahead, investing in the right systems, and training personnel, legal practitioners can ensure smooth compliance while enhancing the efficiency and transparency of their financial operations.

Important Notes. It is recommended that legal partnerships register for e-Invoicing using a “D” registration number, which corresponds to the Bar Council registration number. Where a firm operates multiple branches (e.g., three branches under the same trade name), only a single Tax Identification Number (TIN) can be used for tax filing and e-Invoice reporting, as all branches are treated as a single tax entity under the partnership structure.

Sole proprietors may encounter issues with trade name mismatches when implementing e-Invoicing. This arises because the e-Invoice system reflects the individual’s legal name (as per registration with the Inland Revenue Board), rather than the trade name used in practice. Such discrepancies can create confusion for clients and may affect the professional image or branding of the firm.

Law firms may face heightened scrutiny from the Inland Revenue Board (IRB), particularly as the IRB integrates and cross-verifies data from various sources such as e-Cukai Keuntungan Harta Tanah (e-CKHT), the e-Invoicing platform, and tax declarations submitted to LHDN. This raises concerns over whether billing practices and tax submissions are fully aligned with the Self-Regulation of Occupational Guidelines (SRO). Firms are advised to review their internal billing and accounting processes to ensure strict compliance.

The implementation of e-Invoicing by the IRB aims to plug existing loopholes in tax reporting, especially in service-based industries. By mandating real-time invoice validation and standardization, the e-Invoicing system reduces the risk of underreporting, omission of taxable income, or manipulation of expenses. Law firms must prepare by updating their billing systems, training staff on compliance requirements, and ensuring that all transactions are properly recorded and validated within the required timeframe.