Allocation Key

Apportionment Method

Determination of the specific driver usually depends on the nature of the expense being distributed. For rent, an allocation key based on square meterage is standard practice. If the cost relates to information technology support, the number of workstations or active users provides a more accurate basis for the charge.

Tax Assessment

Chinese tax authorities scrutinize these ratios during transfer pricing audits to prevent the artificial shifting of profits. Ratios must follow the arm’s length principle. If the State Taxation Administration finds the allocation key is arbitrary, it may disqualify the deduction and recalculate the taxable income of the domestic subsidiary.

Double taxation often results if the corresponding entity in the home jurisdiction does not accept the change.

Calculation Integrity

Robust documentation supports the choice of a specific driver against alternative options. The allocation key requires periodic review to ensure it still matches the actual consumption of resources. When production volumes shift or headcount changes, the old ratio becomes obsolete and requires an update.