The Enhanced Deductions Regime (EDR) under the CREATE MORE Act has introduced a new strategic lever for businesses to convert qualified spending into measurable tax efficiency. This regime is a key feature of the Act, which has made the incentives system more responsive to business realities.
For registered business enterprises (RBEs), EDR is not just a compliance provision but a strategic decision that can influence pricing, capital allocation, financing assumptions, workforce planning, supply chain strategy, and ultimately, the expected return on a registered project.
The EDR is generally available to registered domestic market enterprises, high-value domestic market enterprises, registered export enterprises, and certain pre-CREATE RBEs that transferred their registration and opted to avail of EDR. The election is a business decision that should be supported by financial modeling, considering factors such as margins, capital expenditure, labor intensity, power consumption, research and development plans, local sourcing, export promotion activities, and reinvestment strategy.
Under the EDR, qualified RBEs are subject to a 20% income tax rate on taxable income from registered projects or activities, while being allowed additional deductions on selected qualified expenses. These enhanced deductions include additional depreciation allowance, additional labor expense deduction, qualified research and development expenses, training expenses, domestic inputs, electricity cost, reinvestment allowance, and export promotion expenses.
The Department of Finance has issued Department Order No. 026-2026, which provides guidance on how enhanced deductions under EDR may be claimed. The Order clarifies that enhanced deductions are applied only after gross income and ordinary and necessary operating expenses have been determined, and prevents double benefits by requiring that the tax base for enhanced deductions be the actual costs and expenses incurred for the year.
Businesses must properly classify expenses, demonstrate direct relation to the registered activity, and maintain adequate substantiation for enhanced deductions. The allocation process for common costs must be documented and disclosed in the notes to the financial statements. Assets used for administrative, support, or auxiliary services generally do not qualify for additional depreciation allowance, and second-hand machinery and equipment are excluded unless otherwise allowed under the applicable investment priority rules.
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. To substantiate the claim, RBEs must support the appropriation of undistributed profits with a formal board resolution and make the required financial statement disclosures.
Enhanced net operating loss carry-over (NOLCO) is another planning tool under the EDR. 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.
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 for EDR are equally important, including the disclosure of EDR availment in the notes to the financial statements and submission of a notarized comprehensive summary report on the enhanced deductions claimed.
The practical takeaway is that EDR should be modeled 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, but on the numbers, operating model, and ability to comply with the substantiation rules.
To make EDR work, companies should build a cross-functional process with tax defining the rules, finance modeling the benefit and tracking the claims, operations identifying directly attributable costs, human resources classifying qualifying labor and training, procurement supporting domestic input documentation, and legal and corporate secretarial teams preparing board approvals where required.
The CREATE MORE Act has shifted the conversation from incentives as passive entitlements to incentives as performance-based rewards. EDR favors enterprises that invest in people, innovation, capital assets, local sourcing, market expansion, and reinvestment, and rewards businesses that can prove, through records and governance, that their expenditures directly support registered activities.
