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

Mukunoki, Hiroshi and Okoshi, Hirofumi (6. April 2020): Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing. Discussion Papers in Economics 2020-1

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.

• Item Type: Paper
• Keywords: Rules of origin; Free trade agreement; Transfer pricing
• Faculties: Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Economic Policy
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: F13; F15; F23; H26
• Language: English

References

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