E-invoicing in Malaysia: How To Pay Workers With No Work Permit?

Post title 'E-invoice Impact to Workers Without Permit' on white banner overlaying image of fishermen at work on their boats

Now that e-Invoice is in the picture, how should I, as a business owner, pay workers who are undocumented or irregular?

Malaysia is gaining momentum with the implementation of e-invoicing, set to begin on August 1, 2024. However, numerous questions remain unanswered. Recently, the most frequently asked question, which will be the focus of today’s discussion, concerns payments to undocumented or irregular migrants in the Malaysian workforce.

It is widely understood that a significant number of undocumented or irregular migrants are working illegally in Malaysia. Unofficial estimates suggest that the number of these migrants ranges from 1.2 to 3.5 million, in addition to the 2.2 million documented migrant workers, who alone constitute approximately 15 percent of the Malaysian workforce. This information is based on a Human Rights Watch survey published on March 5, 2024.

Why does Malaysia have such high numbers of undocumented workers?

The primary reason for Malaysia having a significant number of undocumented or irregular employees is the high demand for cheap labor in various sectors such as construction, agriculture, and manufacturing. These industries rely heavily on low-cost labor, and employers often prefer hiring undocumented workers to reduce expenses, as these workers are typically willing to accept lower wages and poor working conditions. Additionally, weak enforcement of immigration laws and labor regulations, coupled with corruption and bureaucratic inefficiencies, allows employers to hire undocumented workers with minimal risk of penalties.

Another contributing factor is the labor shortage in Malaysia. Many local workers are unwilling to take on low-paying and physically demanding jobs, creating a gap that is often filled by undocumented migrants. The legal process for obtaining work permits is also complex, time-consuming, and costly, leading some migrants to enter the country illegally or overstay their visas to find employment more quickly and affordably. Furthermore, Malaysia’s position as a transit and destination country for human trafficking exacerbates the issue, with migrants often brought in illegally by traffickers and smugglers who exploit them for labor.

Inadequate bilateral agreements between Malaysia and migrants’ home countries result in insufficient legal pathways for workers to migrate legally, pushing them to seek irregular routes. Lastly, economic inequality in source countries drives many migrants to seek better livelihoods in Malaysia, even if it means doing so illegally. This combination of factors contributes to the high number of undocumented or irregular employees in the Malaysian workforce.

The business owner’s dilemma: To pay higher taxes or higher salary?

When the enforcement of e-invoicing begins, any undocumented or irregular migrants not registered with the Inland Revenue Board (LHDN) will not be eligible for tax deductions, whether they are working as employees or independent individuals. LHDN will disallow tax deductions for employers or business owners employing these unregistered migrants.

From the government’s perspective, this is a positive step towards eliminating the shadow economy, which is a major cause of significant tax losses in Malaysia. Statistics show that last year, Malaysia lost about RM70 billion annually in tax revenue from shadow economy activities. That amount is about 20 percent of the estimated total income of the shadow economy worth RM350 billion a year, which is 30 percent of the Gross Domestic Product (GDP). With such revenue losses to the country, the funds could have been allocated towards various sectors such as development, education, healthcare, and more.

However, because Malaysia heavily relies on foreign labor to remain competitive in the market, business owners may face a dilemma. They will need to decide whether to accept higher taxes or to invest in more expensive local manpower. This quandary arises because undocumented or irregular migrants are typically cheaper to hire. As such, this scenario could lead to the inflation of prices for various services and goods as costs increase.

Which industries will be most impacted?

The agricultural industry is expected to be significantly affected, especially in sectors such as palm oil estates, rubber estates, and rice farms, where a considerable portion of the workforce consists of undocumented or irregular migrants. Similarly, fishermen are also not exempt from this trend, as many working at sea are undocumented or irregular migrants.

Below is the graph of share of agriculture, forestry, and fishing to the gross domestic product (GDP) in Malaysia from 2013 to 2022:

(source: Statista.com)

We also foresee significant impact to wider industries such as construction, maintenance and food and beverage (F&B), which continue to rely heavily on manual labor. Clearly, the impact of e-invoicing extends beyond just the financial sector as payments are the backbone of every enterprise, irrespective of size, industry or influence.

Food for Thought

The successful management of this issue hinges on how the government addresses it. Currently, there seems to be a lack of awareness regarding the economic risks that may emerge post e-invoice implementation. Ignoring this issue is not an option for the government; proactive measures are imperative to prevent potential economic disruptions down the line.

Having said that, as business owners, there are proactive measures you can take to gain somre measure of control in the current situation.

Here are some considerations to take into account as we wait and hear how the government intends to move forward with this matter:

Exercise your responsibility as an employer to apply for a Malaysian work permit on behalf of any foreign workers under your hire. The application must be submitted to the Immigration Department of Malaysia. Once approved, the foreign employee can travel to Malaysia or apply for a visa with reference if required. Foreign workers must be between 18 and 45 years old and are not permitted to bring their families to live in Malaysia. They cannot change jobs or employers without permission from the Ministry of Home Affairs.

Clarify if your foreign workers are registered under the 6P Program, which only allows for them to work in Malaysia for up to 3 years only. Otherwise, they are eligible for employment in Malaysia for up to 10 years.

Consider registering your undocumented workers as taxpayers, either as employees or as registered individuals, to avoid getting caught unawares as an outcome of the government’s goal to minimize or entirely eliminate the shadow economy through e-invoicing.

Employing or harboring illegal immigrants is illegal under Section 55B of the Immigration Act 1959/63 and carries a fine between RM10,000 and RM50,000, imprisonment for up to 12 months, or both, for each illegal immigrant employed. The significant penalties make the risk of hiring illegal immigrants outweigh the benefits.

Are you feeling confused by the e-Invoicing system?

Or overwhelmed by the numerous challenges and difficulties as you implement this new policy?

We understand the complexity of the e-Invoicing system and recognize that implementing it can be particularly challenging for small and medium-sized enterprises (SMEs). To help SMEs fully grasp and adapt to this new policy, we’ve designed a comprehensive 4-hour online course that covers EVERYTHING you need to know to transition to e-invoicing with confidence.

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What you’ll learn in the course:

1. E-Invoicing System Framework

We’ll help you understand the entire framework of the e-Invoicing system, including its operational logic and key implementation points, so you can better adapt your business setup to e-Invoicing.

2. How It Works

We’ll explain the working principles of the e-Invoicing system, covering every step from generation and transmission to receipt, validation, storage, and management of electronic invoices. We’ll also demonstrate how to generate a compliant electronic invoice using accounting software.

3. Impact on Businesses

We’ll discuss the impact of e-Invoicing on businesses, from the responsibilities of business owners to what department managers and employees need to understand. We aim to clarify that implementing e-Invoicing is not solely the responsibility of the business owner but involves everyone in the company.

4. Policy Changes and Response

We’ll keep you updated on all e-Invoicing guidelines changes and provide the latest information and response strategies that you can apply into various scenarios within your business.

5. System Tools and Training

We’ll introduce you to various e-Invoicing systems and accounting software available in the market and provide insights into related training content. You’ll be equipped to decide which e-Invoicing system/software best suits your business needs to reduce costs and improve efficiency.

6. Q&A Session

If you have any questions or concerns that require professional answers, our expert instructors will address them at the end of the course.

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