Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing

Hiroshi Mukunoki and Hirofumi Okoshi

Discussion Papers in Economics from University of Munich, Department of Economics

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

Keywords: Rules of origin; Free trade agreement; Transfer pricing (search for similar items in EconPapers)
JEL-codes: F13 F15 F23 H26 (search for similar items in EconPapers)
Date: 2020-04-06
New Economics Papers: this item is included in nep-int and nep-pbe
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Tariff elimination versus tax avoidance: free trade agreements and transfer pricing (2021)
Working Paper: Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:71608

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