After BIR Freezes LOAs, Philippines Must Consider Gross-Income Taxation Reform

The Bureau of Internal Revenue's unprecedented decision to freeze all Letters of Authority signals a deeper crisis in our tax system that demands structural reform, not just procedural fixes.

Historic Freeze Exposes Systemic Corruption

Finance Secretary Frederick Go and newly appointed BIR Commissioner Charlito Martin Mendoza have jointly announced the suspension of all field audits and LOA issuances nationwide. This dramatic move acknowledges what Filipino taxpayers have long endured: a system where LOAs became instruments of harassment rather than legitimate tax enforcement.

For decades, these letters have terrorized businesses across our archipelago, from Manila's business districts to provincial enterprises in Mindanao and the Visayas. The freeze represents an admission that something fundamental had broken within our tax administration.

Mendoza revealed to the Senate blue ribbon committee that regional directors exercised "absolute authority" over LOA issuance, with no central oversight. This decentralization created thousands of opportunities for manipulation across our diverse regions.

The Staggering Cost of Corruption

Senators JV Ejercito and Erwin Tulfo exposed the shocking scale of abuse: revenue officers allegedly siphoned 70% of LOA collections. While the BIR projected six to eight billion pesos annually from LOA-driven assessments, only two to three billion reached the Treasury.

The corruption reached international proportions, with European and American ambassadors reporting LOA-related harassment. This transformed what should be routine tax enforcement into a national reputational crisis affecting our standing with trading partners and investors.

The Structural Problem Beyond LOAs

Former BIR Commissioner Kim Henares offered a nuanced perspective, acknowledging that LOAs remain essential for tax enforcement while conceding they require strict oversight. Her point illuminates the core dilemma: LOAs are necessary tools that became corrupted through poor implementation.

The Court of Tax Appeals has repeatedly documented this dysfunction. In cases like Puregold Price Club, Inc. v. CIR and Rustan Supercenters, Inc. v. CIR, the BIR issued substantial assessments based on speculative interpretations, only to have them voided by courts for lacking competent evidence.

These cases reveal the fundamental flaw: our net-income taxation system forces BIR examiners to scrutinize inherently subjective expense categories. When revenue officers must interpret depreciation schedules, challenge inventory losses, or question supplier rebates, the system becomes vulnerable to abuse regardless of procedural safeguards.

Why Reforms Fall Short

Commissioner Mendoza's planned reforms, requiring his personal approval for all LOAs and implementing digital oversight systems, represent meaningful improvements. However, they address symptoms rather than the underlying disease.

Centralizing LOA approval may reduce frivolous audits. Digital systems may create audit trails deterring misconduct. Limiting audit frequency may provide relief for repeatedly targeted businesses. Yet these measures cannot eliminate the gray zones that make corruption possible.

The problem is not how many LOAs are issued or who signs them. The issue lies in what LOAs allow examiners to do once issued: engage in subjective interpretations that invite negotiation and, inevitably, corruption.

The Case for Gross-Income Taxation

The sustainable solution requires eliminating the discretionary elements that enable abuse. This means transitioning from net-income taxation, where liability depends on BIR interpretation of expenses, to gross-income based systems focused on objective, measurable data.

Other emerging economies have successfully implemented this transformation. India, Mexico, and Indonesia adopted simplified gross-based or presumptive taxation that reduced audit disputes, increased voluntary compliance, and strengthened taxpayer confidence. Businesses paid predictable taxes instead of navigating negotiations with revenue officers.

The Philippines now possesses the technological infrastructure for this transition. Big data analytics can compute industry-specific gross-income tax rates with accuracy. Artificial intelligence can refine these models annually, ensuring fairness across sectors. Gross receipts can be verified through digital payment channels, bank reports, and third-party data sources, minimizing subjective examiner-taxpayer interactions.

A Moment for Fundamental Change

The LOA suspension should be viewed not as the solution, but as the opening of deeper reform. Our tax system needs restructuring that reduces human discretion and relies on transparent, objective metrics.

Net-income taxation is fundamentally a model built for negotiation, and negotiation provides fertile ground for corruption. In an era where 70% of LOA collections reportedly vanish before reaching the Treasury, anything less than structural change risks perpetuating the failures that brought our system to this crisis point.

The Philippines faces a choice: continue repairing a broken machine or replace it with one designed for transparency. For the sake of our taxpayers, from Luzon's business centers to Mindanao's growing enterprises, and for our nation's fiscal integrity, the path forward increasingly points toward gross-income taxation reform.

The time for half-measures has passed. Our tax system needs fundamental transformation, not just procedural adjustments.