New York Tax Base Erosion: GILTI, Add-Backs, and Combined Reporting

New York’s tax base erosion rules are a stacked set of statutory tools that stop corporations from shifting profits out of the state’s franchise tax base: a 5% inclusion of Global Intangible Low-Taxed Income, mandatory add-backs for royalties and related interest paid to related members, mandatory combined reporting for unitary corporate groups, and economic nexus with market-based sourcing that reaches out-of-state sellers. Each rule targets a different erosion technique, and each carries its own compliance trap. Miss one on the original return and the state has extra years to come back, with interest and penalties layered on top of the underlying tax.

The 5% GILTI Inclusion

Federal law forces U.S. shareholders of controlled foreign corporations to include Global Intangible Low-Taxed Income in gross income, capturing foreign earnings above a baseline return on tangible assets.¹ Left alone, that inclusion would flow straight through federal taxable income into New York’s franchise tax base.

Tax Law Section 208(6-a) treats 95% of GILTI as “exempt CFC income,” leaving 5% in the New York base. The exclusion applies to GILTI from a controlled foreign corporation that is not included in a combined report with the taxpayer, and the calculation is made without regard to the federal Section 250 deduction.²

That remaining 5% is the state’s anti-erosion hook on foreign intangible income. Auditors verify that the included portion is properly apportioned to New York based on the corporation’s in-state activity, so understating the inclusion or misapportioning it is a common exposure point.

Related-Party Royalty and Interest Add-Backs

The classic base erosion move is paying inflated royalties, licensing fees, or interest to a related entity in a low-tax jurisdiction, deducting the payment federally, and parking the income where it faces little tax. Tax Law Section 208(9)(o) requires corporations to add those royalty payments back when computing New York taxable income.²

The statutory definition of “royalty payments” is broad. It covers payments tied to the use, acquisition, or management of patents, trademarks, copyrights, trade secrets, and similar intangibles. It also sweeps in interest deductions under IRC Section 163 to the extent the interest relates to intangible asset transactions.² Borrow from a related entity to fund an IP purchase, deduct the interest federally, and the interest gets added back on the New York return.

“Related member” borrows from IRC Section 465(b)(3)(c) but substitutes a 50% ownership threshold for the federal 10% test.² Once two entities share more than 50% common ownership, the add-back is in play. It does not apply, however, when the taxpayer and the related member are already included in the same combined report, because the intercompany transaction washes out there.

Exceptions

The add-back does not catch every related-party payment. A taxpayer can avoid it when the related member was itself subject to tax on the income at an effective rate meeting a minimum threshold, when the related member passed the payment through to an unrelated third party in the same tax year and the original transaction had a valid business purpose, or when a treaty-based exception applies. The treaty exception requires the related member to be organized under the laws of a country with a U.S. bilateral income tax treaty, the income to be taxed there at a rate at least equal to New York’s rate, and the transaction to reflect arm’s-length pricing.

“Valid business purpose” is defined as a purpose other than tax avoidance that meaningfully changes the taxpayer’s economic position, such as increasing market share or entering a new market.² The burden of documenting any of these exceptions sits on the taxpayer, and a failed claim on audit does not just cost the deduction; it exposes the corporation to interest running back to the original due date.

Mandatory Combined Reporting

Combined reporting is the structural piece of the framework. Rather than letting each entity file separately, so intercompany pricing can drain income from the New York filer, Tax Law Section 210-C forces related corporations engaged in a unitary business to file a single combined report. The rule triggers when one corporation owns or controls more than 50% of the voting power of another corporation’s stock and the corporations are engaged in a unitary business.³

Ownership can be direct or indirect, and the test is also met when the same interests control 50% or more of two or more corporations. The unitary requirement looks at whether the entities share centralized management, purchasing, or other operations that tie them together economically. Once combined, intercompany transactions get eliminated and the group’s total income is apportioned to New York using the group’s collective receipts.

Corporations meeting the 50% ownership test but not the unitary standard can elect combined reporting, and the election locks in for seven years.³ A few categories of entities are carved out regardless of ownership, including corporations taxable under Article 9 or Article 33, New York S corporations, and non-captive REITs and RICs. Alien corporations are generally excluded unless treated as domestic under the Internal Revenue Code or having effectively connected income.

Economic Nexus and Market-Based Sourcing

New York can tax a corporation with no office, employees, or property in the state if its receipts from New York sources exceed an annually adjusted threshold. Crossing that threshold creates an Article 9-A filing obligation regardless of physical presence.⁴

Once inside the tax, a corporation apportions income using a single receipts factor under Tax Law Section 210-A, and New York uses market-based sourcing. What matters is where the customer is, not where the work is done. For service receipts, the statute sets a hierarchy: first, where the benefit of the service is received; if that cannot be determined, delivery destination; and if that also fails, prior-year apportionment fractions as a backstop.⁵ The combination pulls in revenue from companies that perform their work in lower-tax states but serve New York customers.

Public Law 86-272 Has Limits Here

Federal Public Law 86-272 shields an out-of-state company from state income tax if its only in-state activity is soliciting orders for tangible personal property that are approved and filled from outside the state. It does not cover services, digital goods, or intangible property. New York has adopted regulations identifying internet activities that go beyond mere solicitation, and a New York court upheld them, finding the state may treat specific online activities as doing business beyond solicitation. Companies interacting with New York customers through personalized web content, app-based services, or similar functionality should not assume P.L. 86-272 protects them.

Where the Federal BEAT Fits

The federal Base Erosion and Anti-Abuse Tax under IRC Section 59A imposes a minimum tax on large corporations that make substantial deductible payments to foreign related parties, computed by adding those payments back to a modified taxable income and applying a minimum rate.⁶

New York does not have its own version of the BEAT. The state franchise tax starts from federal taxable income, which is computed before the BEAT applies, so the federal minimum tax does not change the New York starting point. New York addresses the same problem with its own tools: the Section 208(9)(o) add-backs, Section 210-C combined reporting, and the GILTI inclusion. Corporations subject to the federal BEAT still compute New York tax under the state’s own modifications and apportionment, which can produce a different result than layering the federal minimum tax onto the state calculation.

Audit Windows and Penalties

New York generally has three years from the filing date to assess additional franchise tax. That window stretches in exactly the situations base erosion adjustments produce. Omit more than 25% of gross income and the assessment period runs six years. The same six-year period applies to deficiencies attributable to abusive tax avoidance transactions. File no return, or file a fraudulent one, and there is no time limit.⁷

A failed add-back or missed GILTI inclusion can easily push reported income more than 25% below the correct figure, opening the six-year window without the taxpayer realizing it.

Penalties under Tax Law Section 1085 stack on top of the tax:

Negligence: 5% of the deficiency, plus 50% of the interest accrued on the underpayment attributable to the negligence.
Fraud: 50% of the deficiency, plus 50% of the interest accrued on the fraud-related underpayment. The fraud penalty replaces the negligence penalty when both could apply.
Substantial understatement: if reported tax falls short of the correct amount by more than 10% or $2,000, whichever is greater, a separate 10% penalty on the difference can apply.⁸

Interest runs on the underpayment from the original due date through payment. Discovered years later, the combined interest and penalty on a base erosion adjustment can exceed the underlying tax, which is the reason the add-backs, combined reporting, and GILTI inclusion are worth getting right when the return is first filed.⁹

1
Office of the Law Revision Counsel. 26 U.S. Code 951A – Net CFC Tested Income Included in Gross Income of United States Shareholders
2
New York State Senate. New York Tax Law 208 – Definitions
3
New York State Senate. New York Tax Law 210-C – Combined Reports
4
New York State Department of Taxation and Finance. Article 9-A Franchise Tax on General Business Corporations
5
New York State Senate. New York Tax Law 210-A – Apportionment
6
Office of the Law Revision Counsel. 26 U.S. Code 59A – Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts
7
New York State Senate. New York Tax Law 1083 – Limitations on Assessment
8
New York State Department of Taxation and Finance. Interest and Penalties
9
New York State Senate. New York Tax Law 1085 – Additions to Tax and Civil Penalties