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taxnotes international
Volume 118, Number 14 „ April 7, 2025

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Full-Fledged Distribution in
Times of Tariffs

by Anuar Estefan

Reprinted from Tax Notes International, April 7, 2025, p. 25

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 COMMENTARY & ANALYSIS
tax notes international®

© 2025 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Full-Fledged Distribution in Times of Tariffs

by Anuar Estefan
alleged foreign government involvement with
Anuar Estefan is a
senior counsel for drug trafficking organizations).1
Chamberlain, Hrdlicka, Tariffs make exports to the United States less
White, Williams & competitive for Mexican and Canadian
Aughtry. He is based in enterprises because tariffs are taxes paid by the
San Antonio. U.S. importer, and represent a cost that is typically
In this article, Estefan passed on to consumers in the form of increased
explores business prices, making domestic products or nontariffed
restructuring foreign products artificially more appealing.
alternatives under a This article discusses how certain Mexican and
full-fledged Canadian companies could increase their
distribution model for competitiveness when selling to the U.S.
Mexican and Canadian marketplace despite tariffs by reorganizing their
exporters facing U.S. business activities through the use of a full-
tariffs. fledged distributor incorporated in the United
Copyright 2025 Anuar Estefan. States.
All rights reserved.
A Full-Fledged Distributor Business Model
On February 1 President Trump announced a The author suggests a business model in
new general 25 percent tariff on all Mexican and which Mexican and Canadian enterprises would
Canadian imports; this is unprecedented in the sell their entire inventory to a related full-fledged
North American region, at least for the past 30 distribution subsidiary in the United States at a
years. After a 30-day pause, tariffs came into force reduced profit margin, resulting in a reduced
on March 4, but were again suspended until April dutiable value of imported goods, mitigating the
2 for products that satisfy the rules of origin set impact of tariffs.
forth in the United States-Mexico-Canada
In the author’s proposed model, a
Agreement. As this article went to press, it is
hypothetical U.S.-based distributor (USCO) (i.e., a
uncertain whether a general tariff on all Mexican
United States corporation), owned and controlled
and Canadian imports will come into effect after
by a Mexican or Canadian enterprise, assumes
April 2.
nearly all contractual risks in a first sale for export
The White House does not justify the tariffs of Mexican and Canadian manufactured goods for
with an explicit commercial purpose; instead, they subsequent resale in the U.S. marketplace.
are imposed under the International Emergency
By assuming a greater risk, USCO should be
Economic Powers Act, based on noncommercial
entitled to, and must earn, a higher profit; USCO
objectives (for example, combating a perceived
will therefore pay corporate income tax in the
lack of effort to decrease unauthorized
United States on its higher profit at the current
immigration, alleged government corruption, and
rate of 21 percent, while the dutiable value of

1
See White House, “Fact Sheet: President Donald J. Trump Imposes
Tariffs on Imports From Canada, Mexico and China” (Feb. 1, 2025).

TAX NOTES INTERNATIONAL, VOLUME 118, APRIL 7, 2025 25

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imported goods is reduced, mitigating the treat all other members of the WTO, including
adverse effect of tariffs. Mexico and Canada, equally, providing the same
The article then analyzes how, under the tariff and regulatory treatment to all “like
appropriate circumstances and with the right products.” This is known as the most favored
corporate structure, Mexican and Canadian nation principle.
enterprises can easily repatriate earnings and In addition, the WTO agreements require
profits of a U.S.-based distributor, without any countries to treat foreign and domestic goods
further taxation in the United States. equally, preventing countries from giving
The figure illustrates the proposed business domestic producers an advantage over foreign
model. producers. This is known as the
nondiscrimination principle, and it’s a keystone to
The USCMA and the WTO trade and commerce following the adoption of the
The author is of the view that the tariffs violate General Agreement on Tariffs and Trade in 1947
U.S. treaty obligations set forth in the USMCA after World War II.
(negotiated and signed under the first Trump A general tariff targeted to products
administration to replace the North American originating in Mexico and Canada likely violates
Free Trade Agreement), and the Marrakesh the MFN and nondiscrimination principles.
Agreement Establishing the World Trade A general tariff on products originating in
Organization (the WTO agreements). Mexico or Canada, as announced by Trump,
In the WTO agreements, the United States, would also violate the USMCA. In the USMCA,
along with all other signatory countries, agreed to the United States, Mexico, and Canada agreed on

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a tariff schedule that essentially eliminated or MEXCO sells its goods to third-party
substantially reduced tariffs in commerce among customers in the United States for $10 per unit,
the three countries. with a profit margin per unit of 15 percent. Third-
party buyers in the United States then resell the

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How Are Tariffs Computed? product to retail consumers for $12.
Tariffs are taxes that the importer of products After the 25 percent tariffs are in force, upon
is required to pay at the port of entry. They are export to the United States, importers would need
calculated ad valorem based on the value to pay a tariff of $2.50 per unit imported.
declared by the importer in an entry summary The amount of the tariff would, in a logical
form, which is filed with the customs authorities. scenario, be passed on to retailers, who would
In determining the value of imported goods, then sell the product for at least $14.50, making
the preferred method of appraisement is the the product more expensive and less competitive
“transaction value,” which is the price actually in the marketplace when compared with domestic
paid or payable for the merchandise when sold or nontariffed alternatives.
for exportation to the United States2 plus amounts In this example, the transaction value of
equal to :
3
MEXCO’s exported goods is $10 per unit, which is
1. the packing costs incurred by the buyer on the price paid by an unrelated distributor in the
the imported merchandise; United States when the goods are sold for export.
2. any selling commission incurred by the Any subsequent profit margin arising from the
buyer on the imported merchandise; sale of the imported goods would be naturally
3. the value, apportioned as appropriate, of related to the importer’s own efforts and business
any assist;
4 activities.
4. any royalty or license fee on the imported
merchandise that the buyer is required to First Sale for Export to a Related Distributor
pay, directly or indirectly, as a condition of One important question is whether the
the sale of the imported merchandise for transaction value in a first sale for export by a
exportation to the United States; and foreign manufacturer to its related full-fledged
5. the proceeds of any subsequent resale, distributor in the United States, as this article
disposal, or use of the imported proposes, is an acceptable transaction value for
merchandise that accrue, directly or the purpose of calculating tariffs. The answer to
indirectly, to the seller. this question has been resolved by the Federal
In the case of related-party sales, the Circuit and applied consistently thereafter by the
transaction value is acceptable if an examination Court of International Trade.
of the circumstances of the sale of the imported A landmark case on point is Nissho Iwai.6
merchandise indicates that the relationship Nissho Iwai involved three parties: (1) a
between the buyer and seller did not influence the Japanese manufacturer of transit passenger cars
price actually paid or payable.
5 (KHI); (2) an intermediary company (NIC), which
Assume that a hypothetical Mexican company was related to the Japanese manufacturer and
(MEXCO) sells products manufactured in Mexico sold the vehicles in the U.S. marketplace; and (3)
in the U.S. marketplace. New York City’s Metropolitan Transportation
Authority (MTA), which was the final purchaser
of the vehicles.
NIC purchased the vehicles from KHI for
subsequent sale to the MTA. As expected, the
2
19 U.S.C. section 1401a et seq. purchase price in the KHI-NIC sale was
3
19 U.S.C. section 1401a(b).
4
The term “assist” is defined in 19 U.S.C. section 1401a(h)(1)(A) and
includes, for example, as the value of materials, components, parts, tools,
dies, and molds supplied by the buyer of imported merchandise to the
exporter or producer. 6
5 Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir.
19 U.S.C. section 1401a(b). 1992).

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COMMENTARY & ANALYSIS

substantially lower than the purchase price in the lead to liquidity issues if sales do not meet
NIC-MTA sale. expectations. In addition, they may face
The government contended at trial that, risks related to fluctuating costs, credit
although the two sales might have qualified as the risk, or delayed payments from customers.

© 2025 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
basis for the transaction value, the NIC-MTA sale, 3. Market risk: Changes in market
which occurred later, should be preferred as the conditions, such as shifts in consumer
transaction value for the purpose of customs preferences, economic downturns, or
valuation. increased competition, can affect the
The Federal Circuit disagreed and held that if distributor’s sales and profitability.
the transaction between the manufacturer and the 4. Supply chain risk: Distributors rely on
intermediary is a sale negotiated at arm’s length, suppliers for timely delivery of goods, so
free from any nonmarket influences and disruptions in the supply chain (caused
involving goods clearly destined for export to the by, for example, supplier delays,
United States, then the manufacturer’s price, geopolitical events, or natural disasters)
rather than the price in the sale from the can affect their ability to meet customer
intermediary to its customer, should be used for demands.
customs valuation purposes. 5. Regulatory and compliance risk:
7
In Synergy Sport International, which also Distributors must comply with local and
involved an intermediary issue and was decided international regulations regarding
shortly after Nissho Iwai, the Court of product safety, labeling, taxes, and trade
International Trade applied the precedent set by laws. Noncompliance can result in fines,
Nissho Iwai by ruling that U.S. Customs and legal challenges, or reputational damage.
Border Protection’s choice of the later sale, when 6. Price and margin risk: Distributors often
two sales were competing for “sale for face the risk of price fluctuations from
exportation” status, violated the valuation customers, which can erode their profit
statute’s prohibition against appraising margins.
merchandise based on the higher of two 7. Credit risk: The risk of nonpayment by
alternative values.
8 customers or delayed payments can strain
For example, in a related-party sale from a the distributor’s cash flow and create
foreign manufacturer to its U.S.-based full- financial instability.
fledged distributor, the latter could acquire title to 8. Currency risk: For international
the goods at the manufacturer’s facilities and distributors, fluctuations in exchange rates
thereafter assume the risk of loss. A full-fledged can affect the cost of goods purchased
distributor, operating under this article’s from foreign suppliers and affect overall
proposed model, would assume the following profitability.
risks in a carefully crafted purchase or supply 9. Risk of loss: Distributors face the risk of
agreement: losing products because of theft, damage
1. Inventory risk: The distributor often during transit, or unforeseen events like
purchases and holds large quantities of natural disasters, which can lead to
inventory, which exposes the distributor financial losses.
to the risk of unsold goods, stock 10. Product liability risk: If the products sold
obsolescence, or changes in market by the distributor cause harm or damage
demand. (for example, because of defects or
2. Financial risk: Distributors usually invest inadequate warnings), the distributor
substantial capital in inventory, which can could be held liable for the costs of
lawsuits, recalls, or compensation, which
could harm its reputation and financial
stability.
7
Synergy Sport International Ltd. v. United States, 17 Ct. Int’l Trade 18 If properly structured, a significant purchase
(1993).
8
19 U.S.C. section 1401a(f)(2)(B).
price reduction could be justified in the first sale

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 COMMENTARY & ANALYSIS

for export by the manufacturer to its full-fledged purposes on the imported inventory from a
distributor in the United States in a contractual related manufacturer should be not greater than
arrangement in which the latter assumes nearly the customs value reported to the customs
all risks and contingencies arising from the sale in authorities.

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the U.S. marketplace, entitling the distributor to a As a result, the U.S. distributor would earn a
higher profit margin upon subsequent sale of the higher return in the United States upon the sale of
imported products. the products to third-party customers, and that
Under this approach, a foreign enterprise return would be subject to corporate income tax in
could neutralize or at least reduce the adverse the United States at a rate of 21 percent.
effects of the tariffs, remaining competitive in the The manufacturer should maintain
United States compared with its domestic or appropriate transfer pricing documentation so
nontariffed foreign competitors. that, upon examination by the exporting country
(Mexico or Canada), the manufacturer can justify
Transfer Pricing its application of the chosen transfer pricing
Section 482 of the Internal Revenue Code method. For example, the manufacturer can show
grants Treasury the authority to adjust the that the export price is at arm’s length under a
consideration of financial transactions between cost-plus method, demonstrating that the
related parties to ensure that profits are allocated manufacturer’s reduced profit margin was based
to each party in a way that reflects the true value upon sui generis contractual terms, for which
added by each party, instead of artificially being risks and liabilities are assumed almost entirely
10
shifted within the group. by the distributor.
The primary purpose of section 482 is to
Repatriation of E&P
prevent tax avoidance by ensuring that
transactions between affiliated companies (for The final step in the proposed model involves
example, parent and subsidiary) are conducted at the repatriation of the E&P of the U.S. full-fledged
arm’s length, meaning that the terms and distributor back to its foreign corporate parent.
conditions are comparable to those that would be For this purpose, the model assumes that a
agreed upon by unrelated parties in comparable Mexican or Canadian enterprise chooses to
transactions. incorporate the distribution entity in the United
Treasury regulations issued under section 482 States as a subsidiary. It could very well be the
provide a series of methods to determine prices case, however, that the manufacturing entity in
for transactions between related companies. In the Mexico is solely a subsidiary of a corporate group
case of tangible property, the regulations provide headquartered in another jurisdiction, in which
four permissible methods: (1) the comparable case the proposed model should still be
uncontrolled price method; (2) the resale price applicable, although with certain adjustments, in
method; (3) the cost-plus method; and (4) the light of each specific corporate structure.
9
comparable profits method. In the example, E&P of the U.S. full-fledged
Exceptionally, section 1059A limits the distributor would be taxed in the United States at
application of each of the foregoing transfer the current corporate income tax rate of 21
pricing methods in the pricing of imported goods percent.
from a related party. In that event, under section Dividends could, thereafter, be paid by the
1059A, the basis of imported goods may not U.S. distribution subsidiary to its corporate
exceed the “customs value” of the goods declared parent, without any overall negative tax impact.
by the importer of record to the customs
authorities.
In this article’s proposed business model, the 10
Mexico, for example, follows the OECD’s transfer pricing
U.S. distributor’s basis for federal income tax guidelines, which include the cost-plus method with comparability
adjustments for the contractual terms of the transaction and the
functions performed by each of the parties to the transaction. OECD,
“Transfer Pricing Guidelines for Multinational Enterprises and Tax
9 Administrations” (2022). See also Mexico’s Ley del Impuesto Sobre la
U.S. Treas. reg. section 1.482-3(a)(1). Renta, articles 179 and 180.

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Dividends paid by a domestic corporation are Undoubtedly, the true cost of this business
classified as fixed or determinable annual or model will fall on the Mexican and Canadian
periodic income in the United States, and governments, which will experience a reduction
generally, the distributing corporation is required in tax revenues because profits that would have

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to withhold 30 percent of the gross amount of the been taxed within their jurisdictions are now
11
dividend. subject to taxation in the United States. This,
However, the Mexico-U.S. tax treaty12 reduces rather than the imposition of tariffs, should be
the withholding tax rate on dividends from 30 regarded as the cost borne by economies that
percent to 5 percent in the event of dividends paid primarily rely on exports as their main source of
by a corporation resident in a contracting state revenue.
(for example, the United States) to a corporate
shareholder resident in the other contracting state Conclusions
(for example, Mexico) that owns at least 10 The tariffs imposed by the United States
13
percent of the distributing corporation’s stock. against Canada and Mexico are designed to: (1)
The withholding tax rate on dividends can be protect domestic manufacturers against more
further reduced to 0 percent in the event of efficient foreign competitors; (2) balance
dividends paid by a corporation resident in a perceived trade imbalances and deficits; and (3)
contracting state (for example, the United States) create incentives (with a punishment stick in
to a corporate shareholder resident in the other hand) for multinational enterprises to
contracting state (for example, Mexico) that owns manufacture their products in the United States.
at least 80 percent of the distributing corporation’s The author thinks this is true, although on paper,
stock, provided that other requirements are also it seems that tariffs are also thought of as a
14
satisfied involving limitation on benefits. sanctioning device for Mexico’s and Canada’s
Mexico allows corporate shareholders of perceived lack of efforts in combating
foreign companies to claim an indirect foreign tax unauthorized immigration and drug trafficking.
credit to account for the corporate income tax paid As established, tariffs that target only Mexican
in its country of residence by a foreign subsidiary, and Canadian products violate the U.S. treaty
15
and a direct FTC for any tax withheld at source. obligations set forth in the USMCA and the WTO
Because of the higher corporate income tax agreements.
rate of 30 percent in Mexico, when compared with Mexican and Canadian enterprises can remain
the 21 percent federal corporate income tax rate in competitive despite tariffs, and this alone proves
the United States, a combination of the indirect the inefficacy of tariffs to promote the desired
and direct FTCs allowable under Mexican tax law commercial objectives.
should not result in any additional tax for the In this article’s proposed model, the U.S. full-
Mexican corporate parent upon a dividend fledged distributor, owned and controlled by a
distribution by its distribution subsidiary in the Mexican or Canadian enterprise, assumes nearly
United States. This will essentially permit the all contractual risks in a first sale for export of
Mexican enterprise to remain competitive in the Mexican or Canadian manufactured goods for
United States without any adverse tax subsequent resale in the U.S. marketplace.
consequences. By assuming a greater risk, the distributor
should be entitled to, and must earn, a higher
profit. The distributor will therefore pay
11 corporate income tax in the United States on its
Section 881(a).
12 higher profit at a rate of 21 percent, while the
The Convention Between the Government of the United States of
America and the Government of the United Mexican States for the dutiable value of imported goods is reduced,
Avoidance of Double Taxation and the Prevention of Fiscal Evasion With neutralizing, or at least mitigating, the adverse
Respect to Taxes on Income, together with a related protocol (signed
Sept. 18, 1992). effect of tariffs.
13
See id. at art. 10(2)(a). At the end of the day, the Mexican and
14
See id. at art. 10(3). Canadian governments bear the burden and will
15
See also Mexico’s Ley del Impuesto Sobre la Renta, art. 5. see their tax collections reduced because profits

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that would otherwise be taxed in those

jurisdictions will now be taxed in the United
States. This, and not the tariffs, should be the price
for economies that rely on exports as their main

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source of revenue. 

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