Making enhanced deductions regime work for registered business enterprises

In investment decisions, tax incentives should not be treated as an afterthought. They influence pricing, capital allocation, financing assumptions, workforce planning, supply chain strategy, and ultimately, the expected return on a registered project. For registered business enterprises (RBEs), the Enhanced Deductions Regime (EDR) under the CREATE MORE Act is therefore more than a compliance provision. If properly understood, it is a strategic lever that can help businesses convert qualified spending into measurable tax efficiency.

The Philippines continues to compete for investments in an environment where investors compare jurisdictions not only on tax rates, but also on predictability, administrative ease, energy costs, talent availability, and the ability to scale. Republic Act No. 12066, or the CREATE MORE Act, amended the CREATE framework to make the country’s incentives system more responsive to business realities. One of its most important features is the EDR, under which qualified RBEs are generally subject to a 20% income tax rate on taxable income from registered projects or activities, while being allowed additional deductions on selected qualified expenses.

For businesses, the key question is no longer simply whether an enterprise is entitled to incentives. The more important question is whether the business has the systems, documentation, and planning discipline to maximise those incentives without creating unnecessary tax risk.

EDR may be available to registered domestic market enterprises, high-value domestic market enterprises, registered export enterprises that elect the regime, and certain pre-CREATE RBEs that transferred their registration and opted to avail of EDR, subject to the terms of their certificate of registration and applicable rules. The election is a business decision that should be supported by financial modelling. In many cases, the more advantageous regime will depend on margins, capital expenditure, labour intensity, power consumption, research and development plans, local sourcing, export promotion activities, and reinvestment strategy.

Department Order No. 026-2026 of the Department of Finance provides important guidance on how enhanced deductions under EDR may be claimed. It clarifies that enhanced deductions are applied only after gross income and ordinary and necessary operating expenses have been determined. It also prevents double benefits by requiring that the tax base for enhanced deductions be the actual costs and expenses incurred for the year, without the benefit of other additional deductions under the Tax Code or special laws.

This rule is critical. EDR is generous, but it is not automatic. The incentives must be supported by actual costs, properly classified expenses, direct relation to the registered activity, and adequate substantiation. Where an RBE has multiple registered projects or both registered and unregistered activities, common costs must be allocated using an acceptable and consistently applied method, such as revenue allocation, cost or expense allocation, employee-count allocation, or another method prescribed by the Secretary of Finance. The allocation process must be documented and disclosed in the notes to the financial statements.

Among the key enhanced deductions is the additional depreciation allowance for qualified assets directly related to the registered activity: 10% for buildings and 20% for machinery and equipment. This can be significant for capital-intensive projects, but businesses should note that assets used for administrative, support, or auxiliary services generally do not qualify. Second-hand machinery and equipment are also excluded unless otherwise allowed under the applicable investment priority rules. Any change in depreciation method still requires prior approval from the Bureau of Internal Revenue (BIR).

Labour expense is another important area. RBEs may claim an additional deduction equivalent to 50% of total labour expense for direct local employees. This includes basic pay, cash bonuses, and certain benefits such as the employer’s mandatory statutory contributions. However, the incentive is limited to local employees directly hired and directly engaged in the registered activity. Managerial, administrative, indirect labour, subcontracted personnel, outsourced workers, and support services are generally excluded in computing the additional labour expense.

Qualified research and development expenses directly related to the registered project may also qualify for an additional 100% deduction, subject to conditions. Covered local expenditures may include salaries of Filipino employees, consumables, and payments to local R&D organisations. To claim this incentive, the RBE must submit an R&D proposal to the concerned Investment Promotion Agency (IPA) before commencing the initiative. This requirement should push companies to treat R&D not merely as an accounting item, but as a planned and documented business program.

Training expenses for Filipino employees directly engaged in production or service delivery may also qualify for an additional 100% deduction. This can support upskilling and productivity, but the scope is not unlimited. Technical training is favoured; general onboarding, team-building activities, field trips, executive education, and leadership programs for senior management are generally excluded unless the applicable rules and IPA determination support qualification. Businesses should therefore design training programs with tax, human resources, and operations teams aligned from the start.

For RBEs with significant local procurement, the additional 50% deduction on domestic inputs can make local sourcing more attractive. The inputs must be directly related to and actually used in the registered project or activity. For locally manufactured goods, at least 50% of the value added should come from locally produced or manufactured components. This incentive supports a broader policy objective: encouraging RBEs to deepen their links with domestic suppliers and help build stronger local value chains.

Electricity cost is another practical concern, especially for manufacturing, logistics, data centers, and other energy-intensive operations. Under the EDR, an additional deduction equal to 100% of qualified power expenses directly utilized in the registered activity may be claimed.  Penalties, surcharges, late payment fees, and similar charges are excluded. If a single meter covers both registered and unregistered activities, the cost must be allocated proportionately. This makes utility monitoring and cost-center discipline essential.

The EDR also provides a reinvestment allowance of up to 50% of reinvested earnings for qualified sectors such as manufacturing and tourism-related activities, subject to limitations, generally available until 31 December 2034. To substantiate the claim, RBEs must support the appropriation of undistributed profits with a formal board resolution and make the required financial statement disclosures. For executives, this links tax planning with capital strategy: the decision to reinvest must be properly authorised, documented, and aligned with business expansion plans.

Export-oriented enterprises may likewise benefit from an additional 50% deduction for approved expenses relating to exhibitions, trade missions, and trade fairs. These activities must be connected to promoting exports, expanding foreign markets, attracting international clients, or enhancing the provision of services to foreign markets. The incentive recognises that market development has a cost, and that businesses competing globally need support not only in production, but also in customer acquisition and international visibility.

Enhanced net operating loss carry-over (NOLCO) is another planning tool. Net operating losses from the registered project or activity during the first three years from the start of commercial operations may be carried over for the next five consecutive taxable years, subject to the rules. However, enhanced NOLCO is computed without the benefit of other additional deductions, and losses generated by the enhanced deductions do not create additional NOLCO. Finance teams must therefore distinguish between operating losses, incentive-driven deductions, and tax attributes that may be carried forward.

There are also safeguards, especially for intercompany charges. Related-party transactions may be used as a basis for enhanced deductions only if the RBE can demonstrate that the transactions were conducted at arm’s length. Transfer pricing documentation is therefore part of the evidentiary support for the RBEs incentive position. 

RBEs availing of EDR may also still be subject to minimum corporate income tax (MCIT) when the MCIT is higher than the income tax computed after applying the enhanced deductions.

The administrative requirements are equally important. Enhanced deductions must be reported under special allowable itemised deductions in the annual income tax return. RBEs must also disclose EDR availment in the notes to the financial statements and submit to the concerned IPA a notarised comprehensive summary report on the enhanced deductions claimed, prepared on a per-project or per-activity basis. These requirements mean that the quality of documentation will often determine whether the incentive is defensible.

The practical takeaway is straightforward: EDR should be modelled before registration, monitored during operations, and documented before the tax return is filed. For export enterprises, the choice between the 5% special corporate income tax and EDR should not be based on headline rates alone. A business with high qualified costs may find EDR more beneficial, while another with lean operations and stable margins may prefer a simpler regime. The right answer depends on the numbers, the operating model, and the company’s ability to comply with the substantiation rules.

To make EDR work, companies should build a cross-functional process. Tax should define the rules; finance should model the benefit and track the claims; operations should identify directly attributable costs; human resources should classify qualifying labour and training; procurement should support domestic input documentation; and legal and corporate secretarial teams should prepare board approvals where required. If done properly, EDR becomes a governance exercise, not just a tax computation.

The CREATE MORE Act has shifted the conversation from incentives as passive entitlements to incentives as performance-based rewards. EDR favours enterprises that invest in people, innovation, capital assets, local sourcing, market expansion, and reinvestment. It rewards businesses that can prove, through records and governance, that their expenditures directly support registered activities.

Since the availment of EDR should be made upon registration with the concerned IPA, the analysis must be done early, before the incentive application is finalised. Review the registered activity, model EDR against other available incentive regimes, if any, map the qualifying costs, and align tax, finance, operations, HR, procurement, and legal teams around a common incentives strategy. In a competitive investment environment, the companies that will benefit most are those that make the right incentive decision at registration and have the discipline to support that choice throughout the project life.

Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

As published in BusinessWorld, dated 04 August 2026