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

Abstract We explore the new roles of rules origin (ROO) when multinational enterprises (MNEs) manipulate their transfer prices to avoid a high corporate tax. The ROO under free trade agreement (FTA) require exporters identify exports be eligible for preferential tariff rate. find that value-added criterion restricts abusive pricing by MNEs. Interestingly, an FTA with can induce MNEs shift profits from low- high-tax country. Because augment tax revenues inside countries, they transform welfare-reducing into welfare-improving one.