Enhanced Deductions Regime Philippines: The 20% Corporate Income Tax Explained

The enhanced deductions regime (EDR) is a tax incentive package under the CREATE MORE Act, Republic Act No. 12066, which amended the National Internal Revenue Code of 1997. A registered business enterprise (RBE) that elects the EDR is taxed at 20% of its taxable income derived from its registered project or activity, instead of the regular 25% corporate income tax rate. This 20% rate applies to both domestic corporations and resident foreign corporations under the EDR, as provided in Sections 27(A) and 28(A)(1) of the Tax Code, as amended by RA 12066.

The EDR is not just a lower rate. It is a package: the RBE pays 20% on taxable income and may also claim a set of enhanced deductions from gross income, which is why the regime is named after the deductions rather than the rate.

Who may elect the enhanced deductions regime

The EDR is available to two types of RBEs: export enterprises and domestic market enterprises. Under of the Tax Code, as amended, each type chooses from a fixed menu of incentive packages, and the choice is irrevocable for the entire entitlement period:

• A registered export enterprise may opt for (1) the Income Tax Holiday followed by either the Special Corporate Income Tax or the EDR, (2) the Special Corporate Income Tax immediately at the start of commercial operations, or (3) the EDR immediately at the start of commercial operations.
• A registered domestic market enterprise may opt for (1) the Income Tax Holiday followed by the EDR, or (2) the EDR immediately at the start of commercial operations.

Two limits matter. The EDR cannot be granted at the same time as the Special Corporate Income Tax, and the Special Corporate Income Tax itself is available only to export enterprises. The incentives are granted only to the extent of the approved registered project or activity under the Strategic Investment Priority Plan, as provided in of the Tax Code, as amended.

The enhanced deductions available

Under (C) of the Tax Code, as amended, an RBE under the EDR may be allowed the following deductions, among others:

• A 100% additional deduction on power expense incurred during the taxable year, but only for power utilized for the registered project or activity.
• A deduction for reinvestment allowance for manufacturing and tourism industries. When a manufacturing or tourism RBE reinvests its undistributed profit or surplus in listed manufacturing or tourism projects or activities, no more than 50% of the amount reinvested may be deducted from taxable income within five years from the reinvestment. This deduction may be availed of only until December 31, 2034.
• A 50% additional deduction on expenses relating to exhibitions, trade missions, or trade fairs, including expenses incurred in promoting the export of goods or the provision of services to foreign markets approved by the concerned Investment Promotion Agency.
• An enhanced Net Operating Loss Carry-Over (NOLCO). The net operating loss of the registered project or activity during the first three years from the start of commercial operation, not previously offset, may be carried over as a deduction from gross income within the next five consecutive taxable years immediately following the last year of the Income Tax Holiday entitlement period.

The Department of Finance, in coordination with the Bureau of Internal Revenue, the Fiscal Incentives Review Board, and the Investment Promotion Agencies, is tasked under to prescribe the terms and conditions for granting the EDR.

Other incentives that may accompany the EDR

An RBE under the EDR may also enjoy a duty exemption on importation of capital equipment, raw materials, spare parts, or accessories, including goods used for administrative purposes, and VAT exemption on importation and VAT zero-rating on local purchases, under Sections 294(D) and (E) of the Tax Code, as amended.

Local government units may also impose an RBE local tax of not more than 2% of the RBE's gross income during the Income Tax Holiday and EDR periods, in lieu of all local taxes and local fees and charges under the Local Government Code of 1991. This local tax cannot be imposed on RBEs under the Special Corporate Income Tax.

How the 20% rate interacts with the regular rates

The regular corporate income tax rate is 25%. Corporations with net taxable income not exceeding P5,000,000 and total assets not exceeding P100,000,000, excluding land on which the business office, plant, and equipment are situated, are taxed at 20% under Section 27(A). That 20% rate for small corporations is a separate rule from the EDR.

The EDR's 20% rate is a special rate for RBEs on income from registered projects or activities. It is not the same as the Special Corporate Income Tax, which is 5% of gross income earned and is available only to export enterprises. Because the EDR is based on taxable income while the Special Corporate Income Tax is based on gross income, the two are structurally different and cannot be combined.

Frequently asked questions

What is the 20% tax rate for registered business enterprises in the Philippines? It is the corporate income tax rate imposed on an RBE under the enhanced deductions regime, under Sections 27(A) and 28(A)(1) of the Tax Code, as amended by RA 12066. It applies to taxable income derived from the registered project or activity.

Can a domestic market enterprise avail of the enhanced deductions regime? Yes. Under of the Tax Code, as amended, a registered domestic market enterprise may opt for the Income Tax Holiday followed by the EDR, or the EDR immediately at the start of commercial operations.

Can the EDR be combined with the Special Corporate Income Tax? No. Under, the EDR cannot be granted simultaneously with the Special Corporate Income Tax.

Practical takeaways

• The EDR gives RBEs a 20% income tax rate on taxable income from registered projects or activities, plus a package of additional deductions.
• Export enterprises and domestic market enterprises may both elect the EDR, but the chosen incentive package is irrevocable for the entitlement period.
• The EDR cannot be combined with the Special Corporate Income Tax.
• The enhanced deductions include additional power expense, reinvestment allowance, trade fair expenses, and enhanced NOLCO, each with its own conditions.
• Incentives are limited to the approved registered project or activity under the Strategic Investment Priority Plan.

Primary sources

The rules discussed above are drawn from the following primary sources. Where the firm's library holds the document as a PDF it is embedded here in full; the rest are cited by title.

RR No. 18-2024 — Implementing Section 32(B)(5) of the National Internal Revenue Code of 1997, as amended by Republic Act 12066, or the CREATE MORE Act (Date posted: December 17, 2024) Digest | Full Text | Annex AOpen in Law LibraryDownload PDF

• REPUBLIC ACT NO. 12066 - AN ACT AMENDING SECTIONS 27, 28, 32, 34, 57, 106, 108, 109, 112, 135, 237-A, 269, 292, 293, 294, 295, 296, 297, 300, 301, 308, 309, 310, AND 311, AND ADDING NEW SECTIONS 135-A, 295-A, 296-A, AND 297-A OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.