Tax evasion crackdown urged

THE crackdown on schemes using service companies to dodge tax should be followed by action against other forms of evasion, accountants said yesterday.

Alexander Mak Kwai-wing, principal at accountants Ernst and Young, pointed out one scheme in which Hong Kong companies sold goods and services at artificially low prices to sister companies overseas, creating a highly effective means of tax evasion.

Because of the low prices, the Hong Kong company only breaks even, while the sister company overseas can be located in a zero-tax zone and make huge profits.

'We have seen a lot of transfer pricing activities being carried out,' he said, adding that although the Inland Revenue had the power to counter such schemes they rarely used it.

'They should either start taking up and invoking this section or remove whatever deficiency it has.' William Chan Wai-hei, partner with accountants Li, Tang, Chen and Co said this system of tax evasion based on transfer pricing was increasingly effective.

'You can say that it's a reasonable transaction and it's very difficult for them to disprove it.' By contrast, simply spiriting cash out of the territory into anonymous offshore locations was illegal.

Mr Mak said the Inland Revenue could also increase the penalty for tax non-payment, which at present is capped at three times the amount of tax withheld.