REVENUE MEMORANDUM CIRCULAR (RMC) NO. 42-2025
This circularizes the IRR of TITLE XIII of the Tax Code, as amended by RA NO. 12066, which is jointly promulgated by the Department of Finance (DOF) and the Department of Trade and Industry (DTI).
RULE I. GENERAL PROVISIONS
SCOPE AND COVERAGE
This IRR shall apply to the following:
- All existing Investment Promotion Agencies (IPAs) as defined in the Tax Code, as amended or related laws with respect to the administration and grant of tax incentives
- All newly registered and qualified expansion projects or activities of export and domestic enterprises under the Strategic Investment Priority Plan (SIPP)
- Registered Business Enterprises (RBEs) with existing projects or activities prior to the effectivity of RA No. 11534 and RA No. 12066
- Other government agencies involved in administering and granting tax incentives to registered enterprises
- Government-owned and/or controlled corporations (GOCCs), government instrumentalities (Gls), government commissaries, and state universities and colleges (SUCS) that were granted tax subsidies under the Tax Expenditure Fund of the annual General Appropriations Act (GAA)
EXTENT OF AUTHORITY TO GRANT TAX INCENTIVES
The Fiscal Incentives Review Board (FIRB) or the concerned IPAs shall grant tax incentives under Title XIII of the Tax Code, as amended, to RBEs only to the extent of their approved registered project or activity under the SIPP.
RULE 2. TAX AND DUTY INCENTIVES
INCOME TAX-BASED INCENTIVES
The following types of income tax-based incentives may be granted to registered projects or activities:
- Income Tax Holiday – All RBEs are exempt from regular income tax on income derived from their registered projects or activities. Also, no creditable withholding tax shall be imposed on income payments to RBEs, and BIR ruling is not required to avail this exemption.
- Special Corporate Income Tax (SCIT) – A five percent (5%) tax on gross income earned shall be imposed on RBEs, in lieu of all national and local taxes, and local fees and charges. Provided, private ecozone developers shall be subject to real property tax on land owned by them under Section 24 of RA No. 7916, as amended.
The five percent (5%) SCIT on gross income shall be allocated as follows:
- 3% to the National Government
- 2% to the Local Government Unit
For this purpose, “gross income earned” refers to gross sales or gross revenues derived from the registered project or activity, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs, but before any deduction is made for administrative expenses or incidental losses during a given taxable period.
Only the following direct cost shall be considered in computing the gross income:
- Direct salaries, wages, or labor expenses;
- Production supervision salaries;
- Raw materials used in the manufacture of products;
- Goods in process (intermediate goods);
- Finished goods;
- Supplies and fuels used in production;
- Depreciation of machinery, equipment, and the portion of the building directly and exclusively used in the registered activity.
- Rent and utilities for buildings, equipment, warehouses, or goods handling directly and exclusively used in the registered activity.
- Financing charges associated with fixed assets used directly and exclusively in the registered activity the amount of which were not previously capitalized;
- Service supervision salaries; and
- Direct materials and supplies used.
c. Enhanced Deduction Regime (EDR) – Deductions may be granted to Domestic Market Enterprises (DMEs) and high-value DMEs, in addition to the allowable ordinary and necessary deductions under Section 34 of the Tax Code, as amended.
RBEs may opt to avail of the EDR, but it cannot be granted simultaneously with the SCIT.
The following may be allowed as enhanced deductions:
- Additional depreciation allowance of assets acquired for the production of goods and services (qualified capital expenditure). RBEs may claim an additional depreciation allowance on qualified capital expenditures directly related to production:
- 10% for buildings
- 20% for machinery and equipment
- Additional deduction on labor expenses. RBEs may claim an additional 50% deduction on direct local labor expenses, excluding labor costs for managerial, administrative, indirect, and support services.
- Additional deduction on research and development expenses. RBEs may claim an additional 100% deduction on R&D expenses directly related to their registered activity, limited to local expenditure incurred for Filipino employee salaries, consumables, and payments to local R&D organizations.
- Additional deduction on training expenses. RBEs may claim an additional 100% deduction on training expenses for Filipino employees directly involved in production, subject to IPA approval based on the SIPP.
- The following shall not be eligible for additional training expense:
- Onboarding workshop for newly hired employees unless proven to be technical in nature
- Team building activities
- Executive education and leadership programs for senior management and C-suite
- Professional and legal training such as seminars on anti-sexual harassment, anti-discrimination, and fraud;
- Safety training such as evacuation plans, fire drills, workplace violence, and first aid. Other safety trainings that are directly related to the performance of core job functions may be covered by the incentives as long as they are part of a technical training program; and
- Quality training such as ISO processes and standards that are not related to the performance of an employee’s core job functions.
- Additional deduction on domestic input expenses. RBEs may claim an additional 50% deduction on domestic inputs directly related to and used in their registered activity.
- Additional deduction on power expenses. RBEs may claim an additional 100% deduction on power expenses incurred in the taxable year.
- Deduction for reinvestment allowance to manufacturing and tourism industries. Manufacturing and tourism RBEs that reinvest undistributed profits in another manufacturing or tourism project listed in SIPP within 5 years may claim up to a 50% additional deduction on the reinvested amount, available until December 31, 2034.
- Additional deductions on expenses relating to exhibitions, trade missions, or trade fairs. RBES shall be allowed to claim an additional deduction of fifty percent (50%) 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 IPA.
- Enhanced Net Operating Loss Carry Over (NOLCO). The net operating loss of a registered project during the first three years of commercial operation, not previously deducted from gross income, may be carried over as a deduction from gross income for the next five consecutive taxable years following the ITH entitlement period or the year of loss for RBEs electing EDR.
CUSTOMS DUTY EXEMPTION
Registered Export Enterprises (REEs) and DMEs shall enjoy exemption from customs duties on their importation of capital equipment, raw materials, spare parts, and accessories for their registered project or activity, including goods used for administrative purposes. Provided, these items are not produced domestically in sufficient quantity, comparable quality, or at reasonable prices.
VAT ZERO-RATING AND EXEMPTION
The VAT exemption on importation and VAT zero- rating on local purchases shall only apply to goods and services directly attributable to the registered project or activity of an REE or a registered High-value DME, including incidental expenses thereto, subject to the following rules:
- Sale of goods or services by a VAT-registered seller to an REE or High-value DME, regardless of location, shall be subject to zero percent (0%) VAT;
- Sale, transfer, or disposal of previously imported VAT-exempt capital equipment, raw materials, spare parts, and accessories shall be subject to the following rules:
- If the purchaser is an REE or high-value DME, regardless of location, the transaction shall be subject to zero percent (0%) VAT; or
- If the purchaser is a DME, regardless of location, the transaction shall be subject to twelve percent (12%) VAT based on the net book value of the capital equipment, raw materials, spare parts, or accessories.
Local sale by an RBE, regardless of the income tax incentives regime and location, shall be subject to 12% VAT, unless otherwise exempt or zero-rated under the Tax Code, as amended.
“Local sales” refer to sales of goods and services to domestic market enterprises or non-RBEs, regardless of location within freeport or economic zones. The VAT liability rests with the buyer of the goods or services.
OTHER INCENTIVES ON IMPORTATION OF PETROLEUM PRODUCTS
Persons who directly import petroleum products for resale within the Philippine Customs Territory or free zones are not entitled to the tax and duty incentives previously mentioned and are subject to the appropriate taxes under the
Tax Code, as amended. However, petroleum products used in international shipping or air transport operations are covered by Sections 109(U) and 135(A) of the Tax Code.
Petroleum products sold to international carriers (both Philippine and foreign registry) for use or consumption outside the Philippines are exempt from VAT and excise tax. Suppliers of these products are allowed to claim a refund of the excise tax paid, provided they can present proof that the products were sold to international carriers for consumption outside the Philippines, following the procedure outlined in Section 135-A of the Tax Code. The Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) are tasked with creating the necessary rules and regulations to facilitate the refund or credit of VAT and excise taxes.
“Petroleum products” refers to items formed during the refining of crude petroleum, including, but not limited to, liquefied petroleum gas, naphtha, gasoline, aviation fuels, diesel oils, and asphalt, provided that the resulting product contains at least 50% of the weight of such petroleum products.
Crude oil intended for refining at a local refinery is exempt from duties and taxes upon importation, including volumes lost during the refining process. Applicable duties and taxes will be due only when the refined petroleum products are withdrawn from the refinery. Should petroleum products produced from imported crude oil be withdrawn for use within the customs territory, all applicable duties, taxes, and charges must be paid to the BOC before release, subject to the prior requirement of an Authority To Release Imported Goods (ATRIG).
REGISTERED BUSINESS ENTERPRISE LOCAL TAX (RBELT)
LGUs may impose a Registered Business Enterprise Local Tax (RBELT) through ordinance, up to 2% of gross income during the ITH and EDR. This tax is in lieu of all other local taxes, fees, and charges under the Local Government Code
(LGC). Provided, the RBELT shall not be imposed on RBEs under SCIT. Also, RBEs certified by BOI as pioneer enterprises and non-pioneer enterprises shall be exempt from local business taxes for 6 years and 4 years, respectively.
If two or more LGUs cover the same enterprise, RBELT must not exceed 2% of the gross income of the project or activity. RBELT sharing among LGUs:
- 50% shared equally among involved LGUs
- 50% allocated based on population
TAXATION AFTER THE EXPIRATION OF THE PERIOD OF AVAILMENT OF INCENTIVES
All RBEs shall pay applicable taxes at regular rates under the Tax Code, as amended and other laws after the expiration of the period of incentives of their registered project or activity.
Nonetheless, an REE may avail the VAT zero-rating on local purchases and VAT-exemption on importation under Section 106, 108, and 109 of the Tax Code, as amended.
TAXATION OF NON-REGISTERED PROJECTS OR ACTIVITIES
Income from non-registered projects or activities is subject to applicable taxes under the Tax Code, as amended.
RULE 3. PERIOD OF AVAILMENT OF INCENTIVES
PRIORITIZATION AND TIERING
The period of availment of incentives shall be based on both location and industry.
The location of the registered project or activity shall be prioritized according to the level of development as follows: (a) National Capital Region (NCR); (b) metropolitan areas or areas contiguous and adjacent to the NCR; and (c) all other areas. Meanwhile, the industry of the registered project or activity shall be based on the national industrial strategy in the SIPP, which defines activity tiers and qualifying conditions.
PERIOD OF AVAILMENT OF INCENTIVES BASED ON LOCATION AND INDUSTRY TIERS
a. For REEs approved by an IPA
| Income Tax-Based Incentives | |||
| Location and Industry Tier | Tier I | Tier II | Tier III |
| NCR | 4 years ITH + 10 years SCIT/EDR; or 14 years SCIT/EDR | 5 years ITH + 10 years SCIT/EDR; or 15 years SCIT/EDR | 6 years ITH + 10 years SCIT/EDR; or 16 years SCIT/EDR |
| Metropolitan areas or areas contiguous and adjacent to the NCR | 5 years ITH + 10 years SCIT/EDR; or 15 years SCIT/EDR | 6 years ITH + 10 years SCIT/EDR; or 16 years SCIT/EDR | 7 years ITH + 10 years SCIT/EDR; or 17 years SCIT/EDR |
| All other areas | 6 years ITH + 10 years SCIT/EDR; or 16 years SCIT/EDR | 7 years ITH + 10 years SCIT/EDR; or 17 years SCIT/EDR | 7 years ITH + 10 years SCIT/EDR; or 17 years SCIT/EDR |
b. For DMEs approved by an IPA
| Income Tax-Based Incentives | |||
|---|---|---|---|
| Location and Industry Tier | Tier I | Tier II | Tier III |
| NCR | 4 years ITH + 10 years EDR; or 14 years EDR | 5 years ITH + 10 years EDR; or 15 years EDR | 6 years ITH + 10 years EDR; or 16 years EDR |
| Metropolitan areas or areas contiguous and adjacent to the NCR | 5 years ITH + 10 years EDR; or 15 years EDR | 6 years ITH + 10 years EDR; or 16 years EDR | 7 years ITH + 10 years EDR; or 17 years EDR |
| All other areas | 6 years ITH + 10 years EDR; or 16 years EDR | 7 years ITH + 10 years EDR; or 17 years EDR | 7 years ITH + 10 years EDR; or 17 years EDR |
c. For REEs approved by the FIRB
| Income Tax-Based Incentives | |||
| Location and Industry Tier | Tier I | Tier II | Tier III |
| NCR | 4 years ITH + 20 years SCIT/EDR; or 24 years SCIT/EDR | 5 years ITH + 20 years SCIT/EDR; or 25 years SCIT/EDR | 6 years ITH + 20 years SCIT/EDR; or 26 years SCIT/EDR |
| Metropolitan areas or areas contiguous and adjacent to the NCR | 5 years ITH + 20 years SCIT/EDR; or 25 years SCIT/EDR | 6 years ITH + 20 years SCIT/EDR; or 26 years SCIT/EDR | 7 years ITH + 20 years SCIT/EDR; or 27 years SCIT/EDR |
| All other areas | 6 years ITH + 20 years SCIT/EDR; or 26 years SCIT/EDR | 7 years ITH + 20 years SCIT/EDR; or 27 years SCIT/EDR | 7 years ITH + 20 years SCIT/EDR; or 27 years SCIT/EDR |
d. For DMEs approved by the FIRB
| Income Tax-Based Incentives | |||
| Location and Industry Tier | Tier I | Tier II | Tier III |
| NCR | 4 years ITH + 20 years EDR; or 24 years EDR | 5 years ITH + 20 years EDR; or 25 years EDR | 6 years ITH + 20 years EDR; or 26 years EDR |
| Metropolitan areas or areas contiguous and adjacent to the NCR | 5 years ITH + 20 years EDR; or 25 years EDR | 6 years ITH + 20 years EDR; or 26 years EDR | 7 years ITH + 20 years EDR; or 27 years EDR |
| All other areas | 6 years ITH + 20 years EDR; or 26 years EDR | 7 years ITH + 20 years EDR; or 27 years EDR | 7 years ITH + 20 years EDR; or 27 years EDR |
ELECTION OF INCOME TAX-BASED INCENTIVE PACKAGE
RBEs shall be allowed to elect the types of income tax-based incentives package which shall be irrevocable for the entire duration of entitlement, to wit:
- For REEs
- ITH followed by 5% SCIT or EDR; or
- 5% SCIT; or
- EDR granted immediately at the start of commercial operation
- For DMEs
- ITH followed by EDR or
- EDR granted immediately at the start of commercial operation
QUALIFIED EXPANSION PROJECT OR ACTIVITY
Qualified expansion projects or activities may register and avail of the incentives as follows:
| Duration of Income Tax-based Incentives | ||||
|---|---|---|---|---|
| Tax Incentives | IPA-approved RBE | FIRB-approved RBE | ||
| REE | DME | REE | DME | |
| SCIT | 8 | N/A | 13 | N/A |
| EDR | 8 | 13 | ||
Expansion projects or activities are entitled to incentives only for the actual increase in production, sales, or capital investment relative to the existing operations. Qualified expansions may also receive VAT exemption on importation, VAT zero-rating on local purchases and duty exemption on importation.
START OF PERIOD OF AVAILMENT
The period of availment of the foregoing income tax- based incentives shall commence from the actual start of commercial operations: Provided, That an RBE must start its commercial operations within three (3) years from the date of its registration, unless otherwise provided in the SIPP and its corresponding guidelines.
EXTENSION OF THE PERIOD TO AVAIL OF INCENTIVES
The maximum extension period is five (5) years for projects approved by IPAs and ten (10) years for those approved by the FIRB, both subject to a performance review by the respective authority.
To qualify, the project must employ at least 10,000 direct local workers, a requirement that must be met within the year immediately following the expiration of the original income tax-based incentive period and maintained throughout the extended period, even if the project no longer satisfies the qualifications in the SIPP.
No Income Tax Holiday (ITH) shall be granted during the extension period.
Applications for extension must be submitted to the concerned IPA or FIRB within one (1) year prior to the expiration of the original income tax-based incentives. If approved, the extension will commence immediately after the original term ends. Applications filed after the expiration of the original incentive period will be automatically denied.
PERIOD OF NON-INCOME TAX BASED INCENTIVES
RBEs may avail of VAT zero-rating on local purchases and VAT and duty exemptions on importation as follows:
- IPA-approved RBEs: May enjoy the said incentives for their entire registration period, starting from the date of registration, provided they meet IPA registration terms and maintain at least 70% export sales in the preceding year.
- FIRB-approved RBEs: May enjoy the said incentives for their entire registration period if they comply
- with IPA registration terms and meet the following:
- Maintain at least 70% export sales.
- High-value DMEs must meet investment or export requirements under Section 293(J); qualified DMEs can avail of incentives until the end of their income tax-based incentive period.
- with IPA registration terms and meet the following:
DMEs may avail of duty exemptions from registration until the end of their income tax-based incentives.
After VAT incentives under Title XIII expire, RBEs may still avail of VAT zero-rating under Sections 106, 108, and 109 of the Tax Code, as amended if they meet the stated requirements.
RULE 4. SIPP
The SIPP outlines the fiscal and non-fiscal support for projects that promote high-skilled jobs, MSME development, domestic product sophistication, reduced import dependence, increased foreign investment, export diversification, and regional growth. It may also identify region-specific investments aligned with the Philippine Development Plan and RA No. 11962.
Contents of the SIPP include:
- A list of priority projects or activities eligible for tax incentives.
- Definitions of location and industry tiers:
Tier I: High job creation, innovation, basic goods/services, critical to industry development, or emerging sectors.
Tier II: Import substitution and critical intermediate goods/services.
Tier III: High-value R&D, advanced manufacturing, and transformative industries
Only projects listed in the SIPP are eligible for application. Unlisted projects are automatically disapproved. All existing SIPP entries remain valid until amended or removed.
The SIPP is valid for three (3) years from the President’s approval, and a new version must be submitted by the BOI before the end of the third year unless extended.
RULE 5. SCOPE
The FIRB has the authority to approve or disapprove tax incentives for registered projects or activities with investment capital exceeding ₱15,000,000,000 pesos, based on the recommendation of the concerned IPA. This threshold may be adjusted by the FIRB in consultation with IPAs.
The IPA have exclusive jurisdiction to register all projects, regardless of investment size.
- IPAs can approve or deny incentives for projects with capital of ₱15 billion or below, provided they comply with Title XIII of the Tax Code as amended and IRR standards.
- Projects registered under special laws not repealed or amended by RA No. 11534 or RA No. 12066 will continue to be administered by the designated IPA.
- If the special law refers to incentives under EO No. 226 the Tax Code’s incentive rules and conditions will apply.
RULE 6. REGISTRATION OF BUSINESS ENTERPRISE
Projects or activities listed in the SIPP may register under the Act.
Every applicant must comply with the following:
- Meet SIPP criteria;
- Comply with constitutional or legal ownership requirements for nationalized activities;
- Satisfy any citizenship requirements for directors, based on filled positions; and
- Ensure the project is within their corporate powers and not prohibited by law.
Applications must be filed electronically via FIRMS or an IPA-linked system. If unavailable, manual filing is allowed. Fees are set by the concerned IPA.
RULE 7. ACTION ON THE REGISTRATION
The IPA shall evaluate applications based on complete documents and notify the applicant of its decision. If denied, a Notice of Denial will be issued with specific reasons, allowing reapplication once issues are addressed.
The Certificate of Registration (COR) is issued by the IPA once all preconditions are met. The COR includes the RBE’s name, business address, TIN, unique control number, registered activity, applicable tax incentives, and the period of entitlement.
RULE 8. APPLICATION FOR INCOME TAX-BASED INCENTIVES
RBEs must annually apply for a Certificate of Entitlement to Tax Incentives (CETI) to avail of income tax-based incentives. Applications are per project, filed electronically via FIRMS or an IPA-linked system after the taxable year but before filing the annual ITR. Manual filing is allowed if systems are unavailable.
Upon verifying compliance with the conditions of the registration, the IPA shall issue the CETI, which must be attached to the ITR.
Incentives are subject to SIPP requirements, performance metrics, and IPA reviews. Non-compliance may lead to suspension or revocation. RBEs shall adhere to the following:
- Incentives are subject to SIPP requirements and performance review by IPA
- Comply with the target performance metrics
- Comply with e-invoicing and e-sales reporting once operational;
- Maintain separate accounting records or entities per registered activity;
- Submit annual reports on beneficial ownership and related parties.
IPAs must submit a compliance report to the FIRB within 90 days after the statutory deadline for filing the annual ITR for registered projects with investment capital exceeding ₱15 billion, and within 180 days for projects with investment capital of ₱15 billion and below.
RULE 9. APPLICATION FOR VAT ZERO-RATING CERTIFICATE
REEs and High-value DMEs must apply annually for a VAT zero-rating certificate with the concerned IPA to avail of VAT zero-rating on local purchases. Applications are per project, filed electronically or manually if systems are unavailable, prior to making purchases. The IPA issues the certificate upon verifying compliance, valid for one calendar or fiscal year.
REEs must meet a 70% export sales threshold, and High-value DMEs must meet export or investment capital requirements. Non-compliance results in disqualification from VAT zero-rating and import duty exemptions for the next year.
Applications for the next period must be filed between the 4th quarter of the current and 1st quarter of the next taxable year. Compliance is assessed based on current or previous performance, depending on the timing of application.
The certificate must be presented to suppliers to claim VAT zero-rating. If VAT is erroneously charged, no refund or credit is allowed; the REE or DME must resolve it directly with the supplier, who must cancel and reissue the invoice.
RULE 10. CUSTOMS DUTY EXEMPTION ON IMPORTATION OF CAPITAL EQUIPMENT, RAW MATERIALS, SPARE PARTS, AND ACCESSORIES
RBEs must secure a Certificate of Authority to Import (CAI) from their IPA for each registered project or activity to import capital equipment, raw materials, spare parts, and accessories with duty and VAT exemptions. The CAI is distinct from other import permits and may be issued manually or electronically (e-CAI), valid for one year and non-transferable.
- availing of the Enhanced Deductions Regime (EDR);
- Imposition of up to a 2% local tax for RBEs availing of Income Tax Holiday (ITH) or EDR as per Section 294(F) of the Tax Code, as amended; and
- Compliance with conditions for availing of duty and VAT exemption on importation and VAT zero-rating on local purchases under Sections 295(C) and (D) of the Tax Code, as amended.
RBEs are prohibited from claiming refunds or credits for taxes previously paid that would otherwise be exempt or zero-rated under RA No. 12066. However, RBEs granted non-income tax-based incentives—such as VAT zero-rating on local purchases, VAT exemption on importation, or duty exemption on importation—may continue to enjoy these benefits until their expiration.
RULE 18. INVESTMENTS PRIOR TO EFFECTIVITY OF RA NO. 11534
RBEs with incentives granted before RA No. 11534 remain subject to the terms of their original COR.
Those granted only an ITH may continue to enjoy it for the specified duration, even if not yet availed as of RA No. 11534’s effectivity. RBEs entitled to ITH followed by the 5% tax on gross income earned may continue both incentives until 31 December 2034, including exemptions from national and local taxes. Similarly, RBEs already availing of the 5% tax on gross income before the law’s effectivity may continue to do so until the same date.
The allocation of gross income shares to LGUs and IPAs must follow existing laws. Non-income tax-based incentives such as duty and VAT exemptions on importation and VAT zero-rating on local purchases may also continue until 31 December 2034, and REEs may further avail of these in line with the Tax Code, as amended and other relevant laws. IPAs must amend the COR or issue updated VAT Zero-Rating Certificates or CAIs as needed.
If any provision of this IRR is subsequently declared invalid or unconstitutional, other provisions hereof, which are not affected, shall remain in full force and effect.
This IRR shall take effect immediately upon publication in a newspaper of general circulation.