Which Business Expenses Are Deductible for Corporate Income Tax in the Philippines?

Companies in the Philippines can deduct qualifying business expenses when calculating taxable income under the regular corporate income tax regime. These include employee salaries, office rent, professional fees, business travel, depreciation, and certain financing costs.

Which operating expenses are tax deductible in the Philippines?

Deductible expenses must generally be ordinary, necessary, reasonable in amount, and supported by appropriate business records.

Salaries, employee benefits, and professional fees

Employee salaries, wages, bonuses, and other reasonable compensation paid for services rendered to the business are generally deductible. Employer contributions to mandatory social security and employee benefit programs may also qualify.

Professional fees paid to accountants, lawyers, auditors, and consultants are deductible when their services relate to business operations.

Rent, utilities, marketing, and business travel

Companies can generally deduct rental payments for offices, warehouses, factories, and other business premises. The same applies to electricity, telecommunications, software subscriptions, and administrative costs.

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Advertising and marketing expenses may qualify, including digital advertising and promotional campaigns.

Business travel expenses, such as transportation and accommodation for employees attending meetings, visiting customers, or supervising operations, may also be deducted.

Entertainment, amusement, and recreation expenses are subject to specific limits. For businesses selling goods or property, the deductible amount is generally capped at 0.5 percent of net sales. For service businesses, the limit is generally 1 percent of net revenue.

Depreciation and financing costs

Unlike recurring operating expenses, the purchase of machinery, equipment, vehicles, and other depreciable business assets generally does not qualify for an immediate deduction. Companies instead recover these costs through depreciation over the assets’ useful lives.

Interest on business loans may also be deductible. However, the allowable deduction is generally reduced by 20 percent of the company’s interest income subject to final tax.

Consider a company with PHP 1 million (US$15,808) in otherwise deductible interest expenses and PHP 100,000 (US$1,581) in interest income subject to final tax. Its interest deduction would generally be reduced by PHP 20,000 (US$316), leaving PHP 980,000 (US$15,491), assuming no other restrictions apply.

Additional restrictions may apply to interest paid to certain related parties.

Can companies deduct payments to overseas parent companies and affiliates?

Philippine companies may deduct qualifying management fees, technical service charges, royalties, and certain financing costs paid to overseas related entities.

A Philippine subsidiary receiving accounting, information technology, or management support from its foreign parent company may deduct the related service fees. The subsidiary must demonstrate that the services were actually provided and benefited its Philippine operations.

Because these transactions involve related parties, the charges must also comply with the arm’s-length principle, meaning their pricing should be consistent with comparable transactions between independent businesses.

Relevant supporting records may include service agreements, invoices, cost allocation calculations, and evidence of services delivered.

Separately, payments to overseas affiliates may be subject to Philippine withholding tax. Management fees, royalties, and interest payments can have different tax treatments, while applicable tax treaties may provide relief where the relevant conditions are satisfied.

Which business expenses cannot be deducted?

Personal expenses of shareholders, directors, and employees are generally not deductible unless they qualify as business expenses or compensation under the applicable rules.

Under Revenue Memorandum Circular (RMC) No. 81-2025, expenses directly attributable to tax-exempt income cannot be deducted against income subject to regular corporate income tax. Expenses solely associated with income subject to final withholding tax are similarly excluded from deductions against regularly taxed income.

Expenses attributable to income taxed under preferential regimes are also subject to restrictions.

The Bureau of Internal Revenue (BIR) may also disallow expenditure where the company cannot provide sufficient evidence of the transaction, its amount, and its business purpose.

Should companies use itemized deductions or the optional standard deduction?

Eligible domestic corporations and resident foreign corporations can choose between itemized deductions and the optional standard deduction (OSD).

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Itemized deductions allow companies to deduct qualifying actual expenses. The OSD instead provides a deduction equivalent to 40 percent of gross income, without requiring companies to substantiate individual operating expenses for an itemized deduction claim.

To compare the two methods, take a company with the following annual figures:

Using itemized deductions, the company’s taxable income would be PHP 6 million (US$94,845). Under the OSD, taxable income would be PHP 7.2 million (US$113,814), before other applicable tax adjustments.

Itemized deductions would produce a lower taxable income in this example.

The selected deduction method is generally irrevocable for the taxable year.

How do investment incentives affect corporate tax deductions?

Registered business enterprises may receive preferential tax treatment under the CREATE MORE Act, which determines how certain business expenses are deducted.

Under the five percent special corporate income tax (SCIT) regime, tax is calculated on gross income from qualifying registered activities. Direct production or service costs may reduce that income, while general advertising and office administration expenses generally do not qualify as direct costs.

Businesses using the Enhanced Deductions Regime (EDR), meanwhile, may claim additional deductions for qualifying expenditure associated with their registered activities. These include:

• An additional 50 percent deduction for qualifying direct labor expenses.
• An additional 100 percent deduction for qualifying research and development expenses.
• An additional 100 percent deduction for qualifying training expenses.
• An additional 100 percent deduction for qualifying power expenses.
• An additional 50 percent deduction for qualifying domestic inputs.

The EDR also provides additional depreciation allowances for qualifying buildings and machinery, reinvestment allowances for eligible manufacturing and tourism enterprises, and enhanced deductions for qualifying export promotion activities.

Each deduction has specific eligibility requirements. The enhanced labor deduction generally covers qualifying direct local employees, while the research and development deduction applies to qualifying local expenditure.

To strengthen oversight of these claims, Department of Finance Order No. 026-2026, circulated by the BIR through RMC No. 105-2026 on September 29, 2026, introduced additional reporting requirements for enterprises claiming enhanced deductions.

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Under these requirements, qualifying enterprises must maintain separate project-level records, apply appropriate cost allocation methods, and submit a notarized comprehensive summary report for each registered project to the relevant investment promotion agency.

The report must be submitted within 30 calendar days after filing the annual income tax return or the statutory filing deadline, whichever is later. Mandatory compliance begins with taxable years ending December 31, 2026.

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