BIR Freezes Tax Audits: Time for Gross Income Reform?
The Bureau of Internal Revenue's unprecedented decision to freeze all field audits and Letters of Authority nationwide signals a deeper crisis requiring structural reform, not just procedural fixes.
Finance Secretary Frederick Go and newly appointed BIR Commissioner Charlito Martin Mendoza jointly announced the suspension of all LOAs and Mission Orders across the archipelago. For decades, these documents have terrorized Filipino businesses, from small sari-sari stores in Mindanao to multinational corporations in Metro Manila.
The Corruption Crisis Exposed
The freeze came after Senators JV Ejercito and Erwin Tulfo revealed shocking allegations: revenue officers were allegedly pocketing up to 70% of LOA collections. While the BIR projected six to eight billion pesos annually from these assessments, only two to three billion reached government coffers.
"Even European and American ambassadors have reported LOA-related harassment," Ejercito disclosed, highlighting how this system has become a national embarrassment affecting our international reputation.
Under the previous system, regional directors wielded "absolute authority" over LOA issuance, with virtually no oversight from Manila. This decentralization created thousands of opportunities for manipulation across our diverse regions, from Luzon's industrial centers to Visayas' agricultural hubs.
Mendoza's Reform Blueprint
Commissioner Mendoza now requires his personal approval for every single LOA, a dramatic centralization aimed at restoring integrity. His technical working group will redesign the entire audit process, embedding controls within an integrated digital system.
Former BIR Commissioner Kim Henares offered a nuanced perspective, acknowledging that LOAs remain essential enforcement tools while conceding they require "tight guardrails" that the institution abandoned.
The Deeper Problem: Net Income Taxation
Court of Tax Appeals cases reveal the system's fundamental flaw. In Puregold Price Club v. CIR and Rustan Supercenters v. CIR, the CTA repeatedly voided BIR assessments based on "speculative" interpretations of expenses, supplier rebates, and inventory variances.
These cases expose the real issue: our net-income taxation system forces BIR examiners to scrutinize inherently subjective expense categories. When revenue officers must interpret depreciation schedules or challenge promotional discounts, corruption becomes inevitable.
The Gross Income Solution
Emerging economies like India, Mexico, and Indonesia have successfully adopted gross-based taxation, focusing audits on objective gross receipts rather than disputable expenses. This approach has increased voluntary compliance while reducing audit disputes.
The Philippines now possesses the technological infrastructure for such reform. Our digital payment systems, combined with artificial intelligence, can compute industry-specific gross-income tax rates with unprecedented accuracy. From the tech hubs of Cebu to the mining operations of Caraga, gross receipts can be verified through digital channels, eliminating subjective examiner-taxpayer negotiations.
A Historic Opportunity
The LOA freeze represents more than crisis management; it's an opening for fundamental reform. While centralizing approval and implementing digital oversight will help, they cannot cure the structural defect of net-income taxation.
As one observer noted, "Net-income taxation is a model built for negotiation, and negotiation is the soil in which corruption thrives." With 70% of collections allegedly vanishing before reaching the Treasury, the Philippines faces a clear choice: repair a broken machine or replace it entirely.
The government's decisive action on LOAs demonstrates political will for reform. Now it must extend that courage to the tax system itself, embracing gross-income taxation as the transparent, objective alternative our growing economy deserves.