Jul 23, 2019
Tariff elimination versus tax avoidance: Free trade agreements and transfer pricing
Public Economics Ph.D. Seminar
- Language
- English
- Presentation type
- Oral presentation (general)
- Organizer
- University of Munich
- Venue
- University of Munich
- Country/Region
- Germany
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.