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.
Service Logs
Meaning
Detailed chronologies of work performed by specific personnel allow for the verification of cross border service charges. Chinese tax authorities require service logs to prove work occurred. These documents bridge the gap between a vague service agreement and the physical reality of business support.
Substantiation Value
Evidence of the location and duration of the work performed justifies the amount on the invoice. When an auditor reviews service logs, they look for specific names of personnel and descriptions of the problems solved. This level of detail confirms that the service was not a shareholder activity or a duplicate of local work.
Narrative Depth
Entries within these documents describe the technical nature of the consultation or the administrative steps taken. A well maintained set of service logs includes the dates of calls and the topics of emails related to the specific project. This chronological record makes it difficult for the tax bureau to claim that the service never happened or lacked economic value.
Verification Failure
Absence of these detailed records leads to the immediate disallowance of the tax deduction. If the service logs are missing or contain only generic entries, the tax office may reclassify the payment as a dividend. This change increases the total tax cost and creates complications for foreign exchange clearance.