Structuring Foreign Employee Secondments under Chinese Corporate Income Tax Rules
Expatriate secondments avoid corporate income tax permanent establishment status only when cost-to-cost recharges match documented local employer control.
Cost plus Recharge
Meaning
Internal benchmarks determine the allocation of expenses by adding a profit margin to the costs incurred during service delivery. A cost plus recharge ensures that a service entity receives a profit margin consistent with market conditions. Tax authorities scrutinize these transactions to prevent the artificial shifting of income.
Markup Calculation
Percentage additions are applied to the total operating expenses to arrive at the final billing amount. When calculating a cost plus recharge, the parties must identify all relevant costs including labor, overhead, utilities and administrative fees. The markup must reflect the functions performed and the risks assumed by the provider.
Revenue Management
Revenue officials evaluate whether the intercompany pricing aligns with the arm’s length principle. Under a cost plus recharge, an inappropriately high or low markup can lead to adjustments and penalties during a tax audit. The State Taxation Administration monitors these recharges to ensure that the domestic tax base is not eroded.
Transfer Justification
Documentation requirements mandate that the taxpayer explains the rationale for the chosen pricing method. A cost plus recharge is typically used for low risk services such as administrative support or shared IT functions where the provider does not own proprietary intellectual property. This method requires a comparable search to find similar transactions between unrelated parties.
The resulting data supports the validity of the internal price. The analysis includes a functional profile of the entity providing the service to prove it operates as a routine contractor. If the entity contributes unique value or intangible assets, the cost plus approach might be rejected in favor of a profit split.
Detailed bench marking studies provide the necessary evidence to withstand regulatory challenges.