Meaning
Administrative checks on the time records submitted by employees confirm the accuracy of labor charges between entities. Regular timesheets verification provides the evidence needed to support intercompany service invoices. This process is a standard requirement for tax deductibility in international jurisdictions including China.
Labor Audit
Internal auditors compare the hours logged against the project milestones and the employee’s contract. During a timesheets verification, the reviewer looks for inconsistencies in the duration of tasks and the seniority of the staff involved.
Evidentiary Support
Documentation of the actual hours worked serves to justify the total cost of the service to the tax bureau. In the context of timesheets verification, the firm must produce signed records that match the amounts shown on the commercial invoice. Tax officials often request these logs during a transfer pricing inspection to confirm that the services were genuinely performed by the individuals listed.
If the logs are missing or incomplete, the authority may treat the payment as a hidden dividend rather than a business expense. This leads to the loss of the tax deduction and the imposition of withholding tax.
Substance Test
Proving that the labor provided a real benefit to the recipient is the final step in the compliance chain. Through timesheets verification, the management demonstrates that the staff were engaged in activities that generated local value. The verification acts as the primary defense against claims of artificial profit shifting.
