Meaning
Internal accounting records kept by service providers in China document the actual time spent by individual employees on specific, client-related tasks. These labor hour logs are necessary for proving that intra-group services were rendered, allowing domestic enterprises to deduct the associated costs for enterprise income tax purposes. The records govern the calculation of service fees, technical support charges, and research and development allocations between affiliated companies.
They draw a clear administrative boundary by excluding general, unallocated working hours and administrative downtime.
Audit Function
Tax bureaus in China use these records to verify the authenticity of service fee deductions under Bulletin 16 of the State Taxation Administration. Without daily or weekly tracking sheets, a domestic subsidiary cannot satisfy the burden of proof required during a tax or transfer pricing audit. The logs must connect each hour of work to a specific contract deliverable or technical support request.
This requirement prevents companies from using arbitrary percentage-based allocations to transfer cash overseas.
Documentary Detail
A compliant timesheet includes the date, the name and job title of the employee, the specific activity performed, and the time spent on that activity. This level of detail allows tax authorities to verify that the service was actually rendered and did not duplicate the existing duties of local Chinese employees. The files must be maintained contemporaneously, as retroactive reconstructions are frequently rejected by experienced tax inspectors.
For transborder services, the records should also align with the employee’s travel and border entry data.
Operational Benefit
Implementing a reliable tracking system protects the enterprise from having its outbound payments disallowed for corporate income tax purposes. If the labor hour logs are complete and consistent, the domestic enterprise can easily demonstrate the necessity and value of the intra-group services to the local tax bureau. This documentation also facilitates smoother approvals for foreign exchange remittances with the State Administration of Foreign Exchange, reducing the risk of transaction delays.
Over the long term, these records provide the foundation for defensible transfer pricing models that can withstand rigorous tax scrutiny. By establishing clear traces of employee labor across borders, firms eliminate the risk of arbitrary tax adjustments on high-value consulting or engineering fees.
