Why QDMTT is reshaping Philippine tax incentives
By Maria Camille Katrina Ozaeta
Much like other jurisdictions, the Philippines has long relied on tax incentives as a powerful lever to attract foreign investment. Reduced corporate income tax (CIT) rates, income tax holidays and enhanced deductions have positioned the country as a competitive hub for manufacturers, exporters, shared services and regional headquarters. However, the landscape of global taxation is shifting, challenging the effectiveness of these traditional incentives and underscoring the need for more strategic, forward-looking policy responses from the government.
The Department of Finance’s recent announcement of a proposed qualified domestic minimum top-up tax (QDMTT), set to take effect on Jan. 1, 2027, signals a significant shift in Philippine tax policy. The measure aligns the country with the Organization for Economic Cooperation and Development’s (OECD) Global Minimum Tax framework by enabling the Philippines to levy a “top-up tax” when in-scope multinational companies (MNCs) operating locally record an effective tax rate (ETR) below 15 percent.
Rather than ceding this taxing right to another jurisdiction under the Pillar Two rules, the QDMTT ensures that the Philippines retains authority over income generated within its borders. Despite this development, the tax incentives currently available to Philippine investors remain vulnerable. Any savings derived from traditional incentives risk being offset by the imposition of top-up taxes.
This does not render incentives irrelevant. Instead, it highlights the need for a fundamental rethinking of how the country designs its incentive framework. The emphasis is shifting away from simply reducing tax burdens toward fostering substantive economic activity — policies that generate employment, strengthen local industries and build areas of comparative advantage for the country.
In our previous article, “The way forward: Revisiting Philippine tax incentives,” we highlighted Singapore’s refundable investment credits (RIC), which qualify as qualified refundable tax credits (QRTC) under the Pillar Two rules. Unlike traditional incentives that typically reduce covered taxes and risk triggering top-up tax, RIC allows taxpayers to offset liabilities with credits granted by the government for undertaking qualifying activities. Any unused credits may be refunded in cash within four years and are treated as QRTC — recognized as income and added to the Global Anti‑Base Erosion income. As a result, QRTC generally exerts a less adverse impact on a company’s effective tax rate (ETR).
While RIC or QRTC provide a mechanism to mitigate the impact of Pillar Two, the OECD Inclusive Framework (IF) has also recognized the continuing importance of tax incentives as a tool to drive investment. Through its Side-by-Side package, the IF introduced qualified tax incentives (QTI), which allow certain incentives tied to expenses and production to operate effectively within the minimum tax framework. By leveraging QTI, MNCs can continue to benefit from incentives closely linked to genuine economic substance, even under the constraints of Pillar Two.
To qualify as QTI, incentives must be broadly available to all taxpayers — based either on expenditure or production — and function as a reduction of corporate income tax (CIT). Unlike RIC or QRTC, QTI is treated as an addition to covered taxes, making them potentially more advantageous for taxpayers due to their more direct and favorable impact on the ETR.
However, the Pillar Two rules impose limits on the extent to which QTI may increase covered taxes: greater of 5.5 percent of payroll costs of the eligible employees or depreciation expense of the eligible tangible asset or one percent of the carrying value of the eligible tangible assets.
With the introduction of QTI, jurisdictions can safeguard the effectiveness of their tax incentive regimes and remain competitive in attracting and retaining foreign investment, while staying aligned with global minimum tax rules.
Against the backdrop of the proposed Philippine QDMTT and the emergence of QTI, there is a clear imperative to reassess the sustainability of the country’s current incentives framework. To preserve competitiveness while protecting the tax base, incentives must be firmly anchored in economic substance. Certain expenditures under the existing enhanced deductions regime (EDR) may already align with this approach and could potentially qualify as QTI.
Nonetheless, there is merit in reassessing and broadening the scope of qualifying expenditures to ensure that all relevant substance-based costs, that are worth encouraging, are captured. For maximum effectiveness, the list of qualifying expenditures should be calibrated on an industry-specific basis, reflecting the diverse cost structures across sectors.
Another area that warrants review is the current 20-percent CIT rate applicable to registered business enterprises under the EDR. Because the value of QTI is determined by applying the statutory tax rate to enhanced deductions, raising the CIT rate to 25 percent would increase the QTI amount added back to covered taxes under the Pillar Two rules.
Taken together, the adoption of the QDMTT and the introduction of QTI represent a fundamental shift in how tax incentives must be designed and evaluated in a global minimum tax environment. QTI offers the Philippines an opportunity to redesign its incentive framework in a way that sustains competitiveness without eroding the tax base.
Ultimately, the success of the Philippine QDMTT will be measured not only by its ability to protect revenues, but by the country’s capacity to transition toward a more sustainable, substance-driven incentives regime — one that balances competitiveness, compliance, and long-term economic development in a Pillar Two world.
Maria Camille Katrina Ozaeta is a director with the Tax & Legal practice of Deloitte Philippines, a member firm of the Deloitte network.
