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Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing

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  • Mukunoki, Hiroshi
  • Okoshi, Hirofumi

Abstract

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.

Suggested Citation

  • Mukunoki, Hiroshi & Okoshi, Hirofumi, 2020. "Tariff Elimination versus Tax Avoidance: Free Trade Agreements and Transfer Pricing," Discussion Papers in Economics 71608, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:71608
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    Cited by:

    1. David R. Agrawal & Ronald B. Davies & Sara LaLumia & Nadine Riedel & Kimberley Scharf, 2021. "A snapshot of public finance research from immediately prior to the pandemic: IIPF 2020," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1276-1297, October.
    2. Hiroshi Mukunoki & Hirofumi Okoshi, 2021. "Tariff elimination versus tax avoidance: free trade agreements and transfer pricing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1188-1210, October.
    3. Hiroshi Mukunoki & Hirofumi Okoshi, 2021. "Rules of origin and consumer‐hurting free trade agreements," The World Economy, Wiley Blackwell, vol. 44(8), pages 2303-2318, August.
    4. Jay Pil Choi & Jota Ishikawa & Hirofumi Okoshi, 2024. "Tax havens and cross-border licensing with transfer pricing regulation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(2), pages 333-366, April.
    5. MUKUNOKI Hiroshi & OKOSHI Hirofumi, 2022. "Antidumping on Tax-induced Dumping," Discussion papers 22063, Research Institute of Economy, Trade and Industry (RIETI).
    6. MUKUNOKI Hiroshi & OKOSHI Hirofumi, 2021. "Wake Not a Sleeping Lion: Free Trade Agreements and Decision Rights in Multinationals," Discussion papers 21036, Research Institute of Economy, Trade and Industry (RIETI).

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    More about this item

    Keywords

    Rules of origin; Free trade agreement; Transfer pricing;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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