The do’s and don’ts of enhanced deductions regime

Department of Finance (DOF) Department Order (DO) 026-2026 puts into effect the Enhanced Deductions Regime (EDR) and serves as the main guide for qualified registered business enterprises (RBEs) that opt to avail themselves of the EDR.

The DO sets out general principles applicable to all enhanced deductions.

These include the rule that enhanced deductions on related-party transactions are disallowed unless the dealings are demonstrably at arm’s length, consistent with existing revenue regulations and issuances. As a rule, enhanced deductions are claimed in the year the expense is incurred, with an exception for reinvestments by manufacturing and tourism enterprises, which may be claimed either outright or spread over five years from the date of actual reinvestment, but in all cases not beyond Dec. 31, 2034.

Since RBEs availing themselves of EDR are subject to the 20 percent Regular Corporate Income Tax (RCIT), it is understood they would also qualify for the imposition of the Minimum Corporate Income Tax (MCIT) starting in the fourth taxable year from the commencement of business operations. The DO now expressly confirms that RBEs under EDR may be subject to MCIT whenever MCIT exceeds RCIT after applying enhanced deductions. For MCIT purposes, gross income must be computed without considering any enhanced deductions.

The DO likewise sets specific conditions for availing themselves of various enhanced deductions. The notable ones include the following:

For the additional depreciation allowance on buildings and machinery, the DO provides that second-hand equipment is generally excluded unless expressly allowed under the Strategic Investment Priority Plan. For Research and Development expenses where both local and foreign costs are incurred, the DO states that only the local portion may be claimed. For training expenses, the training must be “directly related” to the registered activity, which requires it to be both technically and functionally relevant and aligned with the RBE’s operational needs.

RBEs are entitled to enhanced Net Operating Loss Carry Over (NOLCO) on losses of the registered project or activity incurred during the first three years from the start of commercial operations, provided these have not yet been used as deductions. Such losses may be carried forward and deducted from taxable income for the next five consecutive taxable years.

This five-year period runs immediately after the last ITH year for RBEs granted ITH followed by EDR, or after the year of loss for RBEs that choose EDR at the outset.

The DO clarifies that losses incurred in the fourth year of operations are excluded from enhanced NOLCO and qualify only under regular NOLCO rules. Notably, the DO expressly provides that, “any net loss incurred in a taxable year during which the RBE was exempt from income tax shall not be allowed as a NOLCO deduction.”

The DO requires RBEs to submit to the concerned Investment Promotion Agency a notarized comprehensive summary report on enhanced deductions claimed in their Annual Income Tax Return, using a prescribed per-project template, within 30 days from filing the return or the statutory deadline, whichever is later. These reporting requirements apply starting with the taxable year ending Dec. 31, 2026. RBEs that availed themselves of EDR in prior years may still enjoy enhanced deductions without the notarized report, provided that the Certificate of Entitlement to Tax Incentives is attached to the ITR.

In sum, while DO 026-2026 sharpens the rules and tightens compliance, it also provides a clearer roadmap for RBEs seeking to maximize the tax benefits available under the EDR.

Joyce Miguel is a tax supervisor from the Tax Group of R.G. Manabat & Co. (KPMG in the Philippines), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice by the International Tax Review. For more information, you may reach out to Joyce Miguel or Maria Myla Maralit through [email protected], social media or visithttps://kpmg.com/ph/en.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.