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

Hiroshi Mukunoki, Hirofumi Okoshi

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)1188-1210
Number of pages23
JournalInternational Tax and Public Finance
Issue number5
Publication statusPublished - Oct 2021


  • Free trade agreement
  • Profit shifting
  • Rules of origin
  • Transfer pricing

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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