Why does Tax Reporting vs. Clearance Matters
Navigating the Complexities of Malaysia’s Digital Tax Compliance
The emerging global digital tax landscape is far from straightforward, characterized by various models employed by tax authorities. Among these, two critical types of continuous transaction controls would be reporting and clearance, which may seem similar on the surface but have distinct differences that businesses must comprehend to ensure compliance and avoid potential pitfalls.
Defining E-Invoicing Clearance and Reporting:
Let's start by establishing basic definitions for these two models:
- Reporting: This involves periodic, near-real-time, or real-time electronic submission of business data to tax administration platforms. Importantly, it does not depend on tax administration approval for data validity from a tax perspective.
- Clearance: In this model, real-time or near-real-time controls are applied to business transaction data electronically submitted to tax administration platforms. Approval from the tax authority is a prerequisite for data validity in terms of taxation.
In simpler terms, in the clearance model, LHDN Malaysia plays an active role in validating invoices before transactions are completed, whereas the reporting model places the responsibility on companies to prove the validity of invoices post-transaction.
Fundamental Differences in Data:
Apart from the approval process, another significant distinction lies in the data transferred from the taxable party to the tax administration in each model. In the reporting or online audit model, various countries may require different file formats. Some countries establish their XML standards (e.g., Japan, Singapore), while others adopt the SAF-T specification issued by the OECD (e.g., Portugal, Poland), containing invoice data and additional supply-related data.
On the other hand, the clearance model mandates taxable parties to transmit only specific invoice and business data related to the transaction step the tax administration wishes to receive, record, and approve.
Managing Clearance and Reporting E-Invoicing Models Across Systems:
The significance of distinguishing between these models becomes evident in how enterprise software operates. Over the past decades, invoicing systems have bifurcated into two categories: ERP systems for internal business processes and transaction management software (e.g., procure-to-pay or order-to-cash systems). These distinctions amplify the differences in e-invoicing requirements between clearance and reporting models, impacting how companies handle compliance.
The challenge arises because invoice data constantly traverses these systems, moving between sales and logistics systems, ERP records, and transaction management systems. Consequently, when the law mandates real-time or near-time communication of invoices to tax authorities, businesses grapple with deciding whether compliance should be met while invoice data is prepared or recorded in ERP systems or during the business-to-business data exchange process.
Tax authorities often provide vague guidance on this matter, employing generic terminology that leaves room for interpretation. Companies, in turn, exert pressure on vendors spanning various functional categories, potentially resulting in compliance process duplication or even non-compliance.
In some instances, transaction management service providers have withdrawn support in certain countries due to uncertainty surrounding specific reporting requirements. This withdrawal, among other complications, affects suppliers in those countries, hindering their ability to invoice customers abroad.
Advancing Business Amid Compliance Complexities:
The multiplicity of continuous transaction control forms introduced by tax administrations poses challenges for businesses looking to advance their digital agendas. Ideally, companies should not be burdened with navigating a multitude of compliance requirements. Instead, they need indirect tax compliance solutions capable of seamlessly integrating the appropriate compliance measures into their existing and evolving systems landscape. These solutions should operate transparently, ensuring compliance aligns logically with the company's processes.