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
