International presentation
Sep 14, 2019

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

ETSG 2019 Bern Twenty-first Annual Conference
  • Hirofumi Okoshi

Event date
Sep 12, 2019 - Sep 14, 2019
Presentation type
Oral presentation (general)
European Trade Study Group, University of Bern
University of Bern

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.