Building Contemporaneous Defense Dossiers for Cross Border Headquarter Cost Allocations
Building valid defense dossiers for cross border cost allocations requires contemporaneous activity logs proving direct benefit under Bulletin 16.
Time Tracking Logs
Meaning
Documentary records of labor hours spent on specific administrative or technical tasks provide the primary evidence for service fee justifications. An organization maintains time tracking logs to prove that services charged to a Chinese subsidiary were actually rendered by the parent company employees. These records typically include the date, the duration of the activity, and a brief description of the work performed.
Without such evidence, the tax bureau often denies the deduction of the service fee.
Evidentiary Value
Tax examiners verify the beneficial nature of the work by inspecting the time tracking logs against the output of the project. If the logs show only generic descriptions, the auditor may conclude that the service provided no value to the local entity. High quality records link the hours spent to specific deliverables such as technical reports, software code, or marketing plans.
This linkage is the best defense against a shareholder activity disallowance.
Administrative Process
Maintenance of these files involves capturing data from timesheets and project management software. Time tracking logs must be updated regularly to ensure accuracy and to prevent the reconstruction of data after an audit has started. Managers review the entries to ensure that the time spent is reasonable for the task described.
This oversight maintains the integrity of the intercompany billing system.
Personnel Record
The identity of the individuals performing the work is a critical component of the documentation. Time tracking logs list the names and job titles of the service providers to prove they possess the necessary expertise. Auditors check if these employees have the qualifications to provide the services billed at the recorded rate.
Detailed logs help the company justify the arm length nature of the labor costs.