'Hong Kong is seeking a comprehensive double taxation treaty with the mainland that will reduce the tax burden for many companies, but could also open the way for both governments to share tax data.' SCMP, July 15 IF I COULD convince the boss to highlight the last bit of that excerpt above even further, I would do it - screaming black 60-point type in capital letters with a series of exclamation marks added. Has Freddie Ma gone off his rocker? Let us get it straight. We in Hong Kong wash the tax out of profits generated by trading companies across the border. It is how we make a good deal of our living in this town. It helps keep business for our port, it helps provide the investment capital that makes Hong Kong a financial centre and it brings us jobs we would not otherwise have in what we like to call trade services. If there is one thing we cannot afford to do, one thing that could undermine our services economy overnight, it is to share tax data with Beijing. This is not what Secretary for Financial Services and the Treasury Frederick Ma Si-hing directly wants, of course, but he is treading where he would be wise not even to glance, leave alone set foot. What he has in mind is that if a Hong Kong company is liable to tax in both Hong Kong and the mainland, it should be able to set one tax off against the other and vice versa for a mainland company liable to tax in both jurisdictions. We already have a scheme that goes part of the way there. It applies primarily to Hong Kong companies with factories across the border, allowing them to split their profits 50-50 between Hong Kong and the mainland. However, it makes no provision for service-sector firms or the treatment of taxes on royalty payments, interest and dividends. Mr Ma now wants to expand this to a comprehensive double taxation treaty and officials from Inland Revenue are scheduled to meet their mainland counterparts in September for three days of preliminary discussions on this. All very well but the problem is that a double taxation deal of this sort can only really work if the tax authorities in both jurisdictions can see each other's tax books. You cannot rely on the honesty of the taxpayers alone. And if you will not take it from me that this poses a very big threat to Hong Kong then take it from a tax partner of PricewaterhouseCoopers, Tim Lui Tim-leung: 'This may not be good news for many Hong Kong companies as their China operations will become more transparent to the State Administration of Taxation. The Hong Kong government will need to study the treaty cautiously.' Here is how the basic dodge works. The mainland company ships its goods as re-exports through Hong Kong at prices that give it barely any taxable profit in the mainland. Calling them re-exports technically means that further value-added work is done in Hong Kong, say about 10 to 20 per cent of the final sales price. That 10 to 20 per cent (closer to 20 per cent at the moment) is indeed tacked on to the price as the goods go through Hong Kong but, of course, no value-added work is done. The goods mostly go straight across the border to the port and on the ship. The mainland exporter has thus evaded mainland tax and, because this is really an offshore transaction for Hong Kong, no profits tax is paid here either, only some duties on the declaration papers. Cute, isn't it? You may wish to note that in the early 1990s, Hong Kong re-exports originating from the mainland were valued at the equivalent of almost 70 per cent of the mainland's total exports of goods. There are other tricks played but this is probably the biggest single one. Yes, it is a cheat but why should we care? Beijing has been cheated of taxes from southern China for thousands of years. It is nothing new and, more than that, it is no skin off our nose in Hong Kong. We have always kept quiet about it and prospered as a result. But if Beijing now succeeds in getting us to deliver documented evidence of how its profits taxes have been evaded and manages to levy those taxes at source, all we will have achieved is to drive offshore a very substantial portion of that mainstay of our economy - trade and financial services. The tax evasion game would still be played but it would move elsewhere to a tax jurisdiction that does not share tax or other information with Beijing and along with it would go very large number of the service jobs on which our economy relies. Freddie has gone mad to trammel with something as vital to us as this. Will someone please tell him to call it off?