@article{7b5f086f68ed45b389dd04b12b00808a,
title = "Tariff elimination versus tax avoidance: free trade agreements and transfer pricing",
abstract = "We explore the new roles of rules of origin (ROO) when multinational enterprises (MNEs) manipulate their transfer prices to avoid a high corporate tax. The ROO under a free trade agreement (FTA) require exporters to identify the origin of exports to be eligible for a preferential tariff rate. We find that a value-added criterion of ROO restricts abusive transfer pricing by MNEs. Interestingly, an FTA with ROO can induce MNEs to shift profits from a low- to high-tax country. Because the ROO augment tax revenues inside FTA countries, they can transform a welfare-reducing FTA into a welfare-improving one.",
keywords = "Free trade agreement, Profit shifting, Rules of origin, Transfer pricing",
author = "Hiroshi Mukunoki and Hirofumi Okoshi",
note = "Funding Information: This study was conducted as a part of the Project “Analyses of Offshoring” undertaken at the Research Institute of Economy, Trade, and Industry (RIETI). We wish to thank two anonymous referees, Jay Pil Choi, Ruud Aloysius de Mooij, Carsten Eckel, Clemens Fuest, Taiji Furusawa, Andreas Haufler, Jung Hur, Jota Ishikawa, Hiro Kasahara, Yoshimasa Komoriya, Ngo Van Long, Kiyoshi Matsubara, Kaz Miyagiwa, Monika Mrazova, Martin Richardson, Kensuke Teshima, and the participants of the Canadian Economic Association meeting, RIETI, 58th congress of ERSA, Microeconomics Workshop at the University of Tokyo, Summer Workshop on Economic Theory at Otaru University of Commerce, and 21st annual conference of ETSG, Workshop on International Economics at Osaka University, 76th Annual Congress of IIPF. Hiroshi Mukunoki acknowledges financial support from JSPS KAKENHI (Grant Numbers JP19H00594 and JP20K01659). Hirofumi Okoshi acknowledges the financial support from Deutsche Forschungsgemeinschaft. (German Science Foundation GRK1928). The usual disclaimer applies. Conflict of interest: The authors declare that they have no confict of interest. Publisher Copyright: {\textcopyright} 2021, The Author(s).",
year = "2021",
month = oct,
doi = "10.1007/s10797-021-09689-8",
language = "English",
volume = "28",
pages = "1188--1210",
journal = "International Tax and Public Finance",
issn = "0927-5940",
publisher = "Springer New York",
number = "5",
}