IT is a strange situation that Hong Kong is in. It cannot sign treaties with China because from July, the two will legally be one country. At the same time, Beijing cannot issue internal circulars to the territory such as those which its provincial governments are told to follow. So legally, there are plenty of grey areas. Nowhere is this dilemma more evident than in the issue of taxes. With different rules across the border, Hong Kong companies and individuals risk paying double taxes under certain conditions, a threat to the territory's status as a regional corporate base. According to accounting sources, attempts by the Inland Revenue Commissioner to fix this situation have been stalled by Beijing authorities, which argue that any change before the handover would be politically embarrassing. The question before Beijing seems to be one of etiquette: how exactly can they come to an agreement without a treaty or a circular. But waiting until July to reach some consensus may be too late, at least to raise business confidence, say many accountants. Until now, authorities in China have been lenient. China's tax reform is just three years old, and not all situations where double tax should have been in play have been enforced - yet - notes Yvonne Law Shing Mo-han, a partner at Deloitte Touche Tohmatsu. But the double tax threat is real for Hong Kong. The territory's rival for a regional headquarter base, Singapore, is a step ahead because it has a tax treaty with Beijing. Beijing rules that any individual from a non-treaty country who is in China for more than 90 days has to pay income tax. For the Hong Kong businessman who divides his time between the mainland and the territory, that means double taxes. People from treaty countries, meanwhile, can spend more than double that time - 183 days - before they become eligible. Businesses are also liable to double-tax. Take the case of Hong Kong companies setting up on the mainland. Under Hong Kong law, companies only pay tax on what is made in the territory - the so-called source concept - that could include cases where sales are carried out in China but the sales or purchase contract was written in Hong Kong. So a Hong Kong company which negotiates its contracts in Hong Kong and sells to China, with the help of a representative office, could be liable for double tax. So far, China, which stipulates that it is the level of activity on the mainland which determines how much tax a company pays, has been lenient. The country is filled with representative offices of Hong Kong firms which have not declared any increases in activity since they set-up 10 years ago. This way, their representative offices have managed to avoid paying double tax. Also avoiding the China tax net are multinationals with transfer pricing arrangements, where mainland subsidiaries sell products to sister companies overseas, sometimes at artificially low prices. The possibility of double taxation has been used by Singapore to its benefit. It argues that a Singapore-based holding company is a better way to invest in China than a Hong Kong-based one, even though the territory is closer to the mainland. Mainland taxes can be more than three times higher than Hong Kong's maximum of 16.5 per cent. With Chinese tax authorities increasingly taking a tough line on cross-border transactions and taxation arrangements, some kind of formal agreement on these issues is obviously needed as soon as possible.