Understanding the 4-Corner Model of E-Invoicing in Malaysia

 

E-invoicing is transforming how businesses handle invoicing by digitizing the entire process. In Malaysia, adopting the 4-Corner Model, supported by the PEPPOL (Pan-European Public Procurement On-Line) network, is a significant step towards this transformation.

The 4-corner Model of E-Invoicing in Malaysia is built to securely and efficiently exchange electronic documents like e-invoices. Primarily working on standardized protocols, the 4-corner Model emphasizes interoperability and transparency while e-invoices are exchanged between businesses and their respective partners.

This blog explains the 4-Corner Model, its benefits, and its implementation in Malaysia.

What is the 4-Corner Model of E-invoicing?

The 4-Corner Model is a framework that enables smooth and secure electronic document exchanges between different businesses. It involves four key participants:

Corner 1: Supplier (Sender)

The supplier generates and sends the electronic invoice using their accounting software or ERP system.

Corner 2: Supplier’s Access Point (Service Provider)

The supplier’s service provider receives the invoice and converts it into a standardized format, ensuring it meets the agreed-upon specifications, like PEPPOL.

Corner 3: Buyer’s Access Point (Service Provider)

The buyer’s service provider receives the standardized invoice and converts it into a format compatible with the buyer’s systems.

Corner 4: Buyer (Receiver)

The buyer receives and processes the invoice through their accounting software or ERP system.

Role of the 4-Corner Model of E-Invoicing in Malaysia

In Malaysia, the rollout of the 4-Corner Model is a pivotal component of the National E-Invoicing Initiative. This plan aims to make businesses go digital and better follow tax rules. Key players such as the Malaysia Digital Economy Corporation (MDEC) and Lembaga Hasil Dalam Negeri Malaysia (LHDNM) play pivotal roles in ensuring the success of this initiative.

There are three ways taxpayers can generate and send e-invoices.

• Through Direct APIs
• Utilizing PEPPOL Service Providers
• Via PEPPOL Ready Service Providers

These three methods provide businesses with simpler options to meet regulatory requirements while embracing digital transformation.

How 4-Corner Model Works

Essentially, there are only 4 steps involved in the 4-corner Model of e-invoicing in Malaysia.

1. First, the supplier creates an e-invoice in their ERP system (Corner 1). Then, they send it to their selected PEPPOL Access Point (Corner 2).

2. This Access Point converts the invoice into a PEPPOL-compliant format and sends it through the network to the buyer’s Access Point (Corner 3).

3. The buyer’s Access Point then changes it back to a format that fits the buyer’s ERP system
(Corner 4).

4. Finally, the invoice is received and processed by the buyer.

Practical Example

Let’s understand the workings of the 4-corner Model with the help of an example. Here, there are two parties involved: a clothing manufacturer, Siemens Clothing, in Kuala Lumpur, selling a large order of clothes to a retail outlet, H&M, located in Penang.

Total Participants in This Transaction

5. Supplier: Siemens Clothing Malaysia (Sender): Prepares an invoice for a large order of clothes sold to H&M.

6. 2Access Point A (Siemens Clothing’s Service Provider): Receives and standardizes the invoice.

7. Access Point B (H&M’s Service Provider): Transmits the standardized invoice.

8. Buyer: H&M (Receiver): Receives and processes the invoice.

Complete Transaction Flow Between 4 Parties

Here is the step-by-step guide to understand the 4-corner Model:

1. Creating the Invoice

Siemens Clothing prepares an invoice outlining the recent electronics shipment to H&M. The invoice contains essential details like item descriptions, quantities, prices, taxes, and payment terms.

2. Sending the Invoice

Siemens Clothing utilizes its ERP system to dispatch the invoice electronically, automatically directing it to Access Point A, their chosen service provider.

3. Standardizing the Invoice at Access Point A:

Access Point A receives the invoice, converts it into a standardized format that is compliant with PEPPOL regulations, and validates it against Malaysia’s e-invoicing requirements for accuracy.

4. Transmitting to Access Point B

To maintain data integrity, the standardized invoice travels securely over a secure network from Access Point A to Access Point B, H&M’s selected service provider.

5. Receiving and Processing the Invoice

Access Point B validates the invoice received to ensure compliance with local regulations and converts it into a format suitable for H&M’s internal systems.

6. Receiving the Invoice at H&M

H&M retrieves the invoice via their ERP system, where it is automatically logged and reviewed by their finance team to prepare for payment.

7. Completion and Record-keeping

Upon payment processing, both Siemens Clothing and H&M archive transaction records for future reference and compliance with Malaysian tax laws. This ensures a traceable record of the transaction to simplify audits and financial reporting.

Understanding SML & SMP in Peppol E-Invoicing

Two other components also play a role at the time of data transfer via the Peppol network. The 4-corner Model of e-invoicing relies on two components to facilitate smooth and accurate electronic document exchanges: the Service Metadata Publisher (SMP) and the Service Metadata Locator (SML). These components help ensure that invoices and other documents are sent to the correct recipients and processed efficiently.

Peppol SMP: Publishing Capabilities of Participants

In the Peppol network, all participating organizations, such as suppliers and contracting authorities, must publish their receiving capabilities. This includes details like delivery addresses, supported business processes, and document types. This information is managed through a Service Metadata Publisher (SMP).

The SMP acts like an address book or business directory, listing participants’ details within a specific eProcurement community. Typically, an SMP complements an Access Point by publishing the necessary details for its customers. However, third-party organizations can also provide an SMP as an independent service.

Peppol SML: Central Registration for Addressing

To ensure that electronic documents reach the correct recipients, Peppol Access Points must be aware of each other and the participants they support. This is where the Service Metadata Locator (SML) comes into play.

The Peppol SML is a centralized service that helps route electronic documents correctly. It identifies which SMP to use to find the delivery details of any Peppol participant. This system works similarly to how the World Wide Web locates websites based on their domain names.

The SML is a crucial service that maintains a registry of all trusted Peppol Access Points and SMPs.

Benefits of Adapting 4-Corner of E-invoicing

While there are other ways to adapt to e-invoicing in Malaysia, the 4-corner Model of e-invoicing comes with its own set of benefits that surpass other methods –

1. Centralized Information Repository

SMP and SML in the 4-corner Model act as a directory, storing and publishing the receiving capabilities of all participants (such as supported document types and delivery addresses). This helps in efficiently routing invoices and other electronic documents.

2. Standardization and Interoperability

By using standardized protocols like PEPPOL, the 4-Corner Model facilitates interoperability between different businesses. This is maintained regardless of their seller’s internal systems, making it easier to exchange standardized invoices and other documents not just in Malaysia but across the globe.

3. Scalability and Flexibility

The Model accommodates businesses of all sizes and adapts to changing business needs, allowing for scalable growth and the flexibility to integrate with various ERP systems.

4. Global Integration

The use of PEPPOL and other international standards facilitates cross-border transactions, making it easier for businesses to operate and expand internationally.

5. Improved Transparency and Traceability

Each step of the invoicing process is tracked, providing clear visibility into the status of invoices. This transparency aids in better financial management and auditing.

6. In-sync/ Compliant with Regulatory Authorities

The Model verifies and extracts subsets of e-invoice data and shares them with tax authorities like MDEC and LHDNM. It also inserts the valid link/code in the validated e-invoice received from the tax authority and converts it into a commercial e-invoice.

7. Automating The E-invoicing Processes

Another great advantage of this Model is that it allows process automation, reducing the workload of network users. As a result, commercial and administrative procedures are simplified and expedited.

Future Ahead

The 4-corner Model of e-invoicing is a global practice. It’s already being implemented in Europe, Singapore, Australia, New Zealand, and many other countries. These nations have seen significant improvements in their invoicing processes, setting a precedent for Malaysia’s adoption of this innovative Model.

In Malaysia, adopting this Model, supported by the PEPPOL (Pan-European Public Procurement On-Line) network, is a significant step towards enhancing interoperability and transparency in e-invoicing.

By leveraging the strengths of the 4-Corner Model, Malaysian businesses can ensure they are at the forefront of digital transformation, align with global standards, and optimize their invoicing processes for greater efficiency and accuracy.