Misapplied compliance: e-invoicing and charitable organisations
From Andrew Ewe
With the full implementation of Malaysia's e-invoicing regime underway, many charities and non-profit organisations are facing pressure – often from tax advisers and even Inland Revenue Board (LHDN) officers – to issue e-invoices for donations, especially when requested by corporate donors.
The logic appears straightforward: companies want e-invoices to support their tax deduction claims. And so, many have concluded that charitable organisations must comply.
This view is flawed, both legally and practically.
The law is clear: e-invoices are only required for business activities
The statutory requirement to issue e-invoices arises not from guideline language or professional commentary, but from Section 82(c) of the Income Tax Act 1967, which states: 'A person shall, for each year of assessment, issue an electronic invoice in respect of each transaction relating to goods sold or services performed by that person which constitutes the carrying on of a business.'
This provision unambiguously limits the e-invoicing obligation to transactions that are business in nature. Receiving a donation – an unrequited, voluntary transfer – does not constitute the sale of goods or provision of services. It is not a business transaction.
Therefore, there is no legal basis to compel a tax-exempt charitable organisation to issue e-invoices for such donations.
IRB guidelines misinterpreted
The IRB's e-invoicing guidelines refer broadly to 'companies, bodies of persons, associations, etc' as being within the scope. However, they do not emphasise clearly enough that this only applies where those entities are carrying on business.
As a result, many readers have mistakenly assumed that all such entities, including tax-exempt NGOs, are automatically included. This is a misreading.
In law, it is the activity, not the entity form, that triggers e-invoicing.
A flawed practical justification
Some advisers have gone further to suggest that NGOs should secure e-invoices for all expenditures – 'just to be prudent'. This view, too, does not withstand scrutiny. Why would a charitable organisation with tax exemption under Section 44(6) need to compile e-invoices to support tax deductions? If the organisation is not taxed on its income, and if it is not engaged in a business, there is no necessity to compile deductible expense records for tax reporting. Unless an NGO undertakes separate business activities, there is no tax reporting reason to issue and collect e-invoices.
Where a charity does undertake business (for example, a social enterprise), only those business-related transactions would fall within the e-invoice requirement. The rest – donations, grants, sponsorships – remain outside its scope.
The receipt is still the legally recognised document for donations
Donors, both corporate and individual, must provide valid proof to claim tax deductions. This has always been, and remains, the donation receipt in the prescribed format, issued under IRB guidelines. There is currently no legal requirement for e-invoices to support a Section 44(6) deduction.
Until and unless the IRB explicitly states otherwise – with reference to the law, not mere administrative convenience – it is inappropriate to insist that charitable organisations issue e-invoices for donations.
A call for legal clarity
We respectfully urge the IRB to clarify its guidelines, and affirm that non-business charitable organisations are not legally obligated to issue e-invoices. Without such clarity, the sector is at risk of expending limited resources on systems and processes that are neither required by law nor meaningful for compliance.
In our effort to modernise tax infrastructure, let us not abandon the foundational principles of our legal system. E-invoicing has its place – but it must stay within its lawful boundaries.
Andrew Ewe is a Fellow of the Chartered Tax Institute of Malaysia and a former chairman of its Northern Branch.
The views expressed are those of the writer and do not necessarily reflect those of FMT.
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