Meaning
Accounting procedure used to divide salary costs for international employees between an overseas headquarters and a local Chinese entity. Precise cross-border payroll allocation prevents the double counting of expenses and ensures that each jurisdiction taxes only the income earned within its borders. Companies use this method when an expatriate performs duties for both a parent company and a manufacturing plant.
Service Attribution
Documentation must prove the specific amount of time the employee spent working for each respective organization. Rigorous service attribution relies on monthly timesheets and project logs that describe the nature of the tasks performed. The local tax bureau examines these records to verify that the Chinese entity is not overpaying its share of the salary.
Evidence of the specific benefit provided to the domestic operation is required for all allocated costs.
Deductibility Limit
Payments made by a Chinese branch to an overseas parent for labor costs are only deductible if they reflect a genuine business need. Adhering to a deductibility limit ensures that the enterprise income tax base is not eroded by excessive management fees.
Withholding Compliance
Tax must be calculated and paid on the portion of the salary attributable to work performed inside the country. Maintaining withholding compliance requires the local employer to register the expatriate and report total global earnings. This step is necessary even if the overseas entity pays the salary into a foreign bank account.
