[Vantage Point] After BIR freezes LOAs, should PH revisit gross-income taxation?

Finance Secretary Frederick Go and newly appointed Bureau of Internal Revenue (BIR) Commissioner Charlito Martin Mendoza have jointly announced that the tax agency was freezing all field audits and halting the issuance of every Letter of Authority (LOA) and Mission Order (MO) throughout the country. For decades, LOAs have been the most feared instruments in Philippine tax administration — capable of interrupting business operations, delaying investments, and dragging even compliant taxpayers into months of costly negotiations. To suspend them entirely was a sign that something deep inside the institution had broken.

The government, through the Finance department under Go explained that taxpayers had raised concerns about LOAs which could no longer be dismissed. Go says the nation’s tax base — millions of workers, entrepreneurs, and corporations — deserved honest, predictable, and professional audits. Those qualities, he implied, had not always been present. 

Mendoza then formalized the freeze, directing all regional, district, and special audit units to stop issuing LOAs, except in the narrow cases allowed by law. A technical working group would begin reengineering the audit process from the ground up. Mendoza told the Senate blue ribbon committee that , moving forward, every single LOA will require the commissioner’s personal approval. 

Under the current system, LOAs were issued freely at the regional level, with virtually no central oversight. Regional directors exercised “absolute authority,” Mendoza said, and the documents never reached the commissioner’s desk. That decentralization, in practice, had created thousands of opportunities for manipulation. 

Mendoza now plans to restrict the number of LOAs a taxpayer can receive and to embed these controls inside an integrated digital system — an attempt to use technology as a buffer between enforcement and abuse.

The need for such reforms became clear when Senators JV Ejercito and Erwin Tulfo revealed that revenue officers were allegedly siphoning off as much as 70%of LOA collections. (READ: Erwin Tulfo seeks Senate probe into alleged BIR extortion scheme)

On paper, the BIR projected six to eight billion pesos annually from LOA-driven assessments. In reality, only two to three billion pesos reached the Treasury. The balance, lawmakers alleged, vanished into kickbacks. These were not isolated complaints. Ejercito disclosed that even European and American ambassadors had been reporting LOA-related harassment, suggesting that the LOA system had metastasized into a national reputational risk.

Uncollected taxes 

Former BIR Commissioner Kim Henares took a contrasting position, reminding lawmakers that LOAs — when used properly — are essential tools for tax enforcement. 

She pointed to an internal study showing that the Philippines loses roughly ₱1 trillion in uncollected taxes each year due to evasion, under declaration, and non-filing. Without LOAs, she argued, the BIR’s ability to pursue these gaps would be severely constrained. But she also conceded that during her tenure, she imposed strict oversight on LOA issuance, limiting them as part of her audit plan. Her point was nuanced: LOAs are indispensable in theory, but in practice require tight guardrails that the institution later abandoned.

The tension between these two views captures the core of the crisis. LOAs are indeed necessary for tax enforcement — but only in a tax system designed to minimize discretion. In the Philippines, LOAs became the gateway to subjective audits that hinge on disputing expenses, questioning accounting treatments, and interpreting cost structures. This structural flaw explains why LOAs became both indispensable and corruptible at the same time.

The Court of Tax Appeals (CTA) has repeatedly documented what this looks like in the real world in complaints filed against the Commissioner of Internal Revenue (CIR). In Puregold Price Club, Inc. v. CIR (CTA EB No. 1653), the BIR issued a substantial assessment based on alleged discrepancies in cost of sales, supplier rebates, and inventory variances. 

The CTA later voided large portions of the assessment, ruling that they were speculative and unsupported by competent evidence. The story repeated itself in Rustan Supercenters, Inc. v. CIR (CTA Case No. 8868), where the BIR disallowed expenses tied to spoilage, promotional discounts, and merchandising operations. Again, the CTA invalidated the bulk of the assessment because the BIR relied on flawed worksheets rather than substantiated documentation.

These cases demonstrate the real problem: the issue is not the LOA itself — it is the architecture of net-income taxation system, which requires BIR examiners to scrutinize and dispute expense categories that are inherently subjective. A system that compels revenue officers to interpret depreciation, challenge inventory losses, or second-guess supplier rebates will always be vulnerable to abuse. Even if Mendoza approves every LOA personally, the audit process that follows remains grounded in interpretation, not objectivity.

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Does limiting LOAs solve the problem?

The answer is that these reforms will help, but they cannot cure the structural defect.

Centralizing LOA approval may reduce the number of frivolous or predatory audits. A digital system may create a digital trail that deters some forms of misconduct. Limiting the frequency with which a taxpayer can be audited may provide relief for businesses previously hounded by multiple, overlapping LOAs. These are meaningful improvements — but they are improvements applied to a system whose core design invites abusive interpretation.

The real issue is not how many LOAs are issued or who signs them. It is what the LOA allows examiners to do once they have it.

The only sustainable way to break the LOA corruption cycle is to eliminate the gray zones that LOAs exploit. And that requires moving away from a net income taxation regime where tax liability depends on the BIR’s interpretation of expenses. 

Vantage Point sees a need for the Philippines to revisit gross income-based taxation, where audits focus on gross receipts — objective, measurable, digitizable — and no longer hinge on questioning spoilage rates, depreciation schedules, supplier rebates, or promotional discounts.

In other emerging economies, including India, Mexico, and Indonesia, simplified gross-based or presumptive taxation vastly reduced audit disputes, increased voluntary compliance, and strengthened taxpayer confidence. Businesses paid predictable taxes instead of being forced to navigate negotiations. Governments collected more revenue with fewer confrontations. Oversight became easier because discretion shrank.

Here, I believe that the same transformation is possible. The government now possesses the big data infrastructure necessary to compute industry-specific gross-income tax rates with accuracy. Artificial intelligence can refine these models annually, ensuring fairness even in industries with volatile margins. Gross receipts can be verified across digital payment channels, bank reports, and third-party data sources, removing much of the subjective interaction between examiners and taxpayers.

A need for major reforms

This is why the suspension of LOAs — dramatic as it may be — should be seen not as the solution, but as the opening act of a deeper reform. The BIR does not simply need fewer LOAs or more oversight. It needs a tax system that does not oblige examiners and taxpayers into interpretive battles. It needs a structure that reduces human discretion and relies instead on transparent, objective metrics.

Requiring the Commissioner’s approval may slow the abuse. Limiting the number of LOAs may protect some taxpayers. A digital system may bring order to a chaotic process. But none of these measures changes the fundamental truth that net-income taxation is a model built for negotiation, and negotiation is the soil in which corruption thrives.

Gross-income taxation is not just a superior alternative — it is now the only credible antidote.

And in an era where 70% of LOA collections reportedly vanish before reaching the Treasury, anything less than structural change risks repeating the failures that brought the system to the brink.

The Philippines must decide whether to keep repairing a broken machine or replace it with one built for transparency. The answer, I believe, is increasingly clear. – Rappler.com

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