Tariff elimination versus tax avoidance: free trade agreements and transfer pricing

Hiroshi Mukunoki and Hirofumi Okoshi

International Tax and Public Finance, 2021, vol. 28, issue 5, No 6, 1188-1210

Abstract: Abstract We explore the new roles of rules of origin (ROO) when multinational enterprises (MNEs) manipulate their transfer prices to avoid a high corporate tax. The ROO under a free trade agreement (FTA) require exporters to identify the origin of exports to be eligible for a preferential tariff rate. We find that a value-added criterion of ROO restricts abusive transfer pricing by MNEs. Interestingly, an FTA with ROO can induce MNEs to shift profits from a low- to high-tax country. Because the ROO augment tax revenues inside FTA countries, they can transform a welfare-reducing FTA into a welfare-improving one.

Keywords: Rules of origin; Free trade agreement; Transfer pricing; Profit shifting; F13; F15; F23; H26 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing (2020)
Working Paper: Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing (2019)
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DOI: 10.1007/s10797-021-09689-8

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