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Q: In FP7 (ERC), if the Host Institution requests the reimbursement of the Principal Investigator's salary for less time that s(he) actually spent on the project, should the timesheet reflect the hours to be charged or the actual hours worked on the grant?

In FP7, the Host Institution cannot charge more costs than the reimbursement for the time the Principal Investigator actually worked on the project, but it can charge less.
In such a case, timesheets should record the actual hours worked on the project for auditing purposes but it should be made clear in the breakdown table or in the explanatory text of the financial report that total actual hours worked were X but the charged hours are only X-Y.The hourly rate should be calculated based on the total hours (and not only based on the charged hours).
In brief, time charged to the project can always be less (but not more) than indicated in the timesheets.