Invited International presentation
Aug 4, 2019

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

Summer Workshop on Economic Theory (International Economics)
  • Hirofumi Okoshi

Presentation type
Oral presentation (general)
Otaru University of Commerce
Otaru University of Commerce Sapporo Satellite

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.