Understanding Key Tax Incentives Under the Philippine Tax Code 

• A Practical Guide for Qualified Enterprises

 

In the Philippines, the government offers a range of tax incentives designed to support business growth and encourage investment, particularly in priority industries and locations. These benefits are not granted automatically; rather, they are tailored based on factors such as the nature of the business and its geographic location.

A major shift came with the enactment of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act under Republic Act No. 11534. One of the law’s central goals is to promote regional development by offering more generous incentives to enterprises that choose to operate outside Metro Manila. This strategic move supports economic decentralization and opens new opportunities in the provinces—effectively bringing “greener pastures” closer to home for many Filipinos.

In this article, we highlight the most significant tax incentives currently available to eligible businesses:

1. Income Tax Holiday (ITH)

   The Income Tax Holiday offers a full exemption from income tax for a period of four (4) to seven (7) years, depending on the registered enterprise's location and industry classification. This incentive is particularly attractive for start-ups and expanding businesses as it significantly reduces initial tax burdens. (refer to the table in this Article)

2. Post-ITH Incentives: SCIT or EDR

   After the ITH period ends, registered business enterprises (RBEs) may choose between two incentive schemes:

• • Special Corporate Income Tax (SCIT)

  Under this option, an RBE pays a 5% tax on Gross Income Earned (GIE), which replaces all national and local taxes. This simplified tax structure is ideal for businesses seeking predictability and ease in compliance.

• • Enhanced Deductions Regime (EDR)

  Instead of the flat 5% SCIT, an RBE may opt for enhanced deductions against its taxable income. While this requires more detailed accounting, it can lead to substantial tax savings.
  Examples of allowable additional deductions under EDR include:

  • • Enhanced depreciation for buildings and equipment
  • • Additional deduction for labor expenses
  • • Double deduction for research and development
  • • Additional training expenses

  Note: Domestic Market Enterprises are generally not eligible for this option.

These tax incentives form part of the broader strategy to make the Philippines more competitive globally while encouraging inclusive growth across regions. Enterprises can strategically position themselves for long-term success by understanding and leveraging these benefits.

Enhanced Deductions under the CREATE Act

(Sections 295–296 of the National Internal Revenue Code as amended)

Eligible Registered Business Enterprises (RBEs) may opt for the Enhanced Deductions Regime (EDR) after the Income Tax Holiday period, as provided under the CREATE Act. Below is a summary of allowable additional deductions and the conditions for their availment:

Expense Category	Additional Deductible Amount	Conditions for Availment
Depreciation Allowance	- Additional 10% for Buildings - Additional 20% for Machinery and Equipment	Applies only to assets directly used in the production of goods or services by the registered project. Assets related to administrative or support functions are excluded.
Direct Labor Expense	50% additional deduction on direct labor costs	Excludes managerial, administrative, indirect, and support service personnel costs. Only direct production labor is covered.
Research and Development (R&D)	100% additional deduction on R&D expenses	Must be directly related to the registered activity or project. Deduction is limited to local R&D spending, including salaries of Filipino employees, consumables, and payments to local R&D organizations.
Training Expenses	100% additional deduction on training expenses	Applies only to training activities approved by the Investment Promotion Agencies (IPAs) under the Strategic Investment Priority Plan (SIPP). Training must be given to Filipino employees directly involved in production.
Net Operating Loss Carry-Over (NOLCO)	NOLCO incurred during the first 3 years of operations may be carried over and deducted from gross income for up to 5 years after the ITH period	Only applicable to losses incurred within the initial three years of commercial operations and after the Income Tax Holiday period ends.

 

Incentives Package for Registered Business Enterprises (RBEs)

As Provided under the CREATE Act
Registered Business Enterprises (RBEs) are classified into two main categories:

• • Export Market Enterprise (EME) – Enterprises that export at least 70% of their total production.
• • Domestic Market Enterprise (DME) – Enterprises that export less than 70% or primarily cater to the domestic market.

Available Incentives for DMEs and EMEs

 

Incentive Type	Export Market Enterprise (EME)	Domestic Market Enterprise (DME)
Income Tax Holiday (ITH)	✔	✔
Special Corporate Income Tax (SCIT)	✔	✘
Enhanced Deductions Regime (EDR)	✔	✔
Customs Duty Exemption	✔	✔
VAT Exemption on Importation	✔	✔

 

Incentive Duration Based on Industry Tier and Location

The duration of incentives granted under the CREATE Act varies depending on:

• • Industry Tier (I, II, or III) as classified under the Strategic Investment Priority Plan (SIPP)
• • Business location, with greater incentives for locating outside Metro Manila to encourage regional development.

Export Market Enterprise

Location	Tier I	Tier II	Tier III
NCR	4 ITH + 10 EDR/SCIT, or 14 EDR/SCIT	5 ITH + 10 EDR/SCIT, or 15 EDR/SCIT	6 ITH + 10 EDR/SCIT, or 16 EDR/SCIT
Metropolitan/Adjacent to NCR	5 ITH + 10 EDR/SCIT, or 15 EDR/SCIT	6 ITH + 10 EDR/SCIT, or 16 EDR/SCIT	7 ITH + 10 EDR/SCIT, or 17 EDR/SCIT
All Other Areas	6 ITH + 10 EDR/SCIT, or 16 EDR/SCIT	7 ITH + 10 EDR/SCIT, or 17 EDR/SCIT	7 ITH + 10 EDR/SCIT, or 17 EDR/SCIT

 

Domestic Market Enterprise

Location	Tier I	Tier II	Tier III
NCR	4 ITH + 10 EDR, or 14 EDR	5 ITH + 10 EDR, or 15 EDR	6 ITH + 10 EDR, or 16 EDR
Metropolitan/Adjacent to NCR	5 ITH + 10 EDR, or 15 EDR	6 ITH + 10 EDR, or 16 EDR	7 ITH + 10 EDR, or 17 EDR
All Other Areas	6 ITH + 10 EDR, or 16 EDR	7 ITH + 10 EDR, or 17 EDR	7 ITH + 10 EDR, or 17 EDR

 

Note: DMEs are not entitled to the 5% SCIT and may only avail of the Enhanced Deductions option.

Registered Business Enterprise may elect on the incentives that they would wish to avail based on the table above. However, once election is made, the incentive package of choice shall be irrevocable for the entire period of availment.

Regulatory Compliance Requirements

RBEs must submit periodic reports to their respective Investment Promotion Agency (IPA) that administers their tax incentives.

• • Non-compliance penalties include:
• • Administrative fine ranging from ₱100,000 to ₱500,000
• • Possible cancellation of RBE registration

 

This article was prepared by Morfe, Ceneta & Co., and CPAs for general information only and should not be used as a replacement for expert advice.