Attribution and allocation of income from electronic commerce (II)

*Domestic law

– Attribution and allocation of profits between head office and
PE

This issue is relevant both for resident corporations with a PE abroad and foreign
corporations with a PE in Switzerland.

Intercantonal allocation rules
The method of allocation of income at the international level is strongly influenced by the rules applicable to intercantonal enterprises. There is currently no specific legislation for the avoidance of intercantonal double taxation but the rules applicable to this situation were established by the Supreme Court in a long and rich jurisprudence.  This case law seems particularly relevant to the field of electronic commerce because, already decades ago, the Supreme Court defined some rules of allocation of intercantonal transport (trains or boats), electrical and telecommunications companies whose activities bear some similarities to electronic commerce.
Intercantonal rules for the allocation of business profits are normally based on
the fractional method of allocation. In other words, the total profits of the enterprise are apportioned by reference to various formulae. When the fractional method is applicable, profits and capital are apportioned either on the basis of financial statements (so-called “direct fractional” method) or on the basis of other criteria such as production factors (labour, capital) or turnover (so-called “indirect fractional” method).
For train transport companies, in particular, railways and railway stations are
characterized as PEs. Profits are attributed in accordance with the frequency of
traffic in the various cantons involved (taking into account both persons and
goods).  In particular, the Court ruled that an allocation method based on the
length of the railways was unacceptable. Due to the importance of the headquarters, the canton in which the seat of the company is located is attributed a praecipuum of 20 per cent (preallocation).
For electrical companies, electrical antennas, transformer stations and other
types of similar installations are regarded as PEs in the place in which they are
located. The allocation of profits is based on the ratios of production factors (labour and capital) in each of the cantons involved.29 Production factors include, in particular, the central station, turbine, dynamo installations, dam, transformer stations, electrical antennae, etc. The factor capital is allocated according to the capitalized amount of salaries.
The allocation of profits of telecommunication companies is a recent example.
It arose with the privatization of the sector and, in particular, the constitution of Swisscom AG, the main service provider in the business. There is yet no court case on this field. The method of attribution applied today focuses on turnover and is based on various criteria (such as connection fees per canton)  The canton in which the company is incorporated gets a preallocation percentage (praecipuum) of 20 per cent.
To date, in the field of electronic commerce, no specific method of attribution
has been developed. From the above examples, it seems, however, that a method of allocation may be found which takes into account the extent to which an intercantonal activity participates in the value creation process. For transport, the frequency of passengers (including goods) is taken into account. For electricity, it is the infrastructure which is relevant. For electronic commerce, it should probably be the turnover generated by each customer, paying due regard to the functions performed by the head office (praecipuum) and, if any, other PEs.