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. Deputy Commission of the Inland Revenue Allan Gill agreed some dodgers might regard paying triple taxes as a risk well worth taking. However, he disclosed that internal guidelines on penalties had recently been uprated because 'we did not feel that we were getting any great improvement in compliance'. The guidelines, which are confidential, are used by the Inland Revenue to penalise tax dodgers up to the triple tax ceiling and are imposed according to the circumstances of the case, with a right of appeal. The Inland Revenue's greatest crackdown in the past few years has been the controversial move against service companies, a legal tax avoidance scheme in which top managers became the sole employee of limited companies which then entered into a contract to supply services. Mr Chan said those buying a brand-new, top-of-the range Mercedes-Benz using these schemes could enjoy $600,000 off their tax bill in a single year. Thanks to the Inland Revenue crackdown, announced in the 1994 Budget but not put into legislation until last summer, hundreds of top-level executives were having to renegotiate their employment terms or face huge tax bills.