IT IS A crackdown that has been threatened about as many times as the late paramount leader Deng Xiaoping was rumoured dead in the last two years of his life.

But if all that Beijing wants this time is 300 million yuan a year, it may have some hope that the foreign-invested tax cheats whom it is targeting may spare them a pittance. By my reckoning, the amount of tax evaded on their export shipments through Hong Kong alone is many times as great.

Let me explain just one variant of the transfer pricing game. If you are an exporter in the mainland, do you really want to pay a 33 per cent tax on corporate profits?

No, you do not and you have an easy way to avoid it. Let us say you have a customer in the United States who will pay $125 for goods that cost you $100. What you do is ship those goods to Hong Kong with a price tag that says you are selling them for $100. You may say $102 and pay mainland tax on the $2, but then again you may not.

When the goods arrive in Hong Kong, they go directly to the ship, where they are called re-exports. They are called so because the paperwork takes a more circuitous route. Along the way in Hong Kong, that price tag is changed to $125.

You now have your profit, secure from mainland tax authorities, and you pay no tax on it in Hong Kong either. This is only a trade declaration. What is more, you have your profit in a hard currency rather than yuan.

And how much tax do people who play this game evade? Let us play with some numbers here. As the first chart shows you, foreign-invested enterprises, the target of this new crackdown, now account for almost 62 per cent of the mainland's exports, a high figure indeed but it is Beijing's own.

Now let us assume that they also account for 62 per cent of Hong Kong's re-exports originating in China. The real proportion is probably higher, but we shall take this one and we now have a figure of 804 billion yuan last year for re-exports through Hong Kong by foreign-invested enterprises in the mainland.

Next, look at the second chart. It shows Hong Kong's overall rate of re-export margin for consumer goods. I have figures only up to 2003, but we shall assume they have been constant since then. This margin supposedly represents extra manufacturing work done in Hong Kong before these goods are shipped to a final destination. Hah! Find me the factories that do this work. It consists of paperwork only except for a very small proportion.

Thus, take the 25 per cent this chart shows and apply it to our earlier re-export number. We now have a figure of 201 billion yuan in profits that transfer pricing magically produced in Hong Kong last year for these foreign-invested enterprises.

Final step. Apply a 33 per cent mainland corporate tax rate to this and we get 66.3 billion yuan in taxes that should have been paid to the mainland treasury but never were. Not a missing 300 million yuan but 221 times as much.

Okay, I know the real figure is nowhere near as high. That 33 per cent is a maximum tax rate and there are many reductions from it for foreign-invested firms. It is also much lower for coastal cities and special economic zones. But assume it is only half of that 33 per cent and you still get a multiple of more than 100 times the official figure of 300 million yuan evaded.

All that I wish to do here is point out the absolute maximum that mainland tax proceeds evaded in Hong Kong by foreigners operating in China could be. That figure is so great as to suggest that 300 million yuan is far below reality.

But should we in Hong Kong do something about it?

Please not. I note from our report on this crackdown that Hong Kong has yet to adopt an international standard for documentation on transfer pricing. Let us make sure we never do. This particular laundry service that we offer mainland exporters is one of the keystones of our economy.

By all means, let our government officials make tut-tut-tut noises about it. But when it comes to adopting a new documentation standard, what they must do is suck in their breath and say 'ahhhh, it's all so difficult'.