Documenting Direct Economic Benefit and Cost Allocation Methods under Bulletin 6
Chinese subsidiaries deducting parent service fees require direct economic benefit logs, cost pool transparency, and arm-length allocation keys under Bulletin 6.
Contemporaneous Evidence
Meaning
Records generated at the time of a transaction provide the primary basis for demonstrating that related party dealings follow market principles. Taxpayers must maintain contemporaneous evidence to support the transfer pricing methods chosen during the fiscal year. This file stays on site for inspection by the State Taxation Administration rather than being submitted with every return.
Regulatory Submission
Annual reports on related party transactions trigger the requirement for a full local file when certain volume thresholds are crossed. While small enterprises remain exempt, any entity involved in significant cross border activity prepares contemporaneous evidence to avoid administrative penalties. The deadline for completing this document falls on June 30 of the following year.
Substantiation Utility
Verification of service fees or royalty payments depends on the existence of time logs and emails that date back to the moment of delivery. Authorities reject documents created retrospectively during an audit because these backdated files lack the weight of contemporaneous evidence. Precise records confirm that the cost was actually incurred.
Evidentiary Threshold
Inability to produce supporting documents leads to a deemed profit assessment. When a firm cannot provide contemporaneous evidence, the bureau applies its own industry benchmarks to calculate taxable income. Taxes rise.