Presentations

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

Language
English
Presentation type
Oral presentation (general)
Organizer
Otaru University of Commerce
Venue
Otaru University of Commerce Sapporo Satellite
Country/Region
Japan

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.