Due to the support and management of China subsidiary mainly from Taiwan head office, such as development of foreign market, purchase and comparison of quotation, legal affairs, accounting, human resource assignment, the expenses will be incurred from these abovementioned services. So, it becomes a significant issue to discuss if the costs shall be assumed wholly by the head office or any other way to share them.

Many China subsidiaries’ chef of finance are worried about whether the apportioned expenses would be defined as “Management Expense” between the head office and subsidiary or not, which is likely to be removed from the list of expenses or the transparency of apportionment computation basis is insufficient, which might bring the risk of permanent establishment to pay more amount of taxes in the future, or such paid taxes could not be offset in Taiwan. This phenomenon makes the head office unwilling to share the costs with subsidiaries.

Nevertheless, if the entire expenditures are assumed by the head office, the performance of head office and subsidiary might be unfair and blurred and the imposition on income tax would increase accordingly. In addition, the total amount of expenditures are not possible to digest and deduct for the head office itself, so it is suggested to plan how to share the costs with subsidiaries carefully and reasonably and proceed cost-plus pricing pursuant to the original costs to comply with the independent transaction principle of transfer pricing.

Here are 5 points shall be noticed upon the apportionment of expenses:

1. Category. Such as expenses incurred from the development of business or purchase. The actual situation shall be dependent on each subsidiary to categorize each expense;
2. Nature. It is avoided to define the nature of expense as “Non-beneficial Service” due to which may be unable to list as expense; For example, the head office provides the subsidiary with human resource service, including recruitment, incentives, but the subsidiary could supply these services for themselves originally. So, it is unable t to list the related expenses since the items are repetitive and be recognized as non-beneficial services.
3. It shall be aware of the consistency of apportionment. Such as the ratio of income or employee in each subsidiary.
4. The required apportioned expenses to add the required profits.
5. Contract, procedure and other details shall be fully complied with the related laws.

In conclusion, Taiwan head office should evaluate the overall situation and financial management upon the apportionment of expenses with the subsidiary. The 5 points in the last paragraph shall be bear in mind for each head office which plans to share the cost with its subsidiary.