The “Floodgate” scandal has opened a Pandora’s Box of government irregularities, the latest of which involves the Bureau of Internal Revenue (BIR) and it is worse in scope than the corruption anomalies involving the Department of Public Works and Highways (DPWH).

An alleged money-making scheme involving the use of Letters of Authority (LoA) issued by the BIR to harass taxpayers has affected even locally based foreign enterprises.

The extortion operation is creating ripples and is likely among the factors that is leading foreign investors to disregard the country.

“What alarmed me was when European ambassadors and some ambassadors from different countries, and the American and European chambers, started to complain that they, too had been subjected to harassment by the BIR through the LoA. So they’re weaponizing the LoA for corruption,” Senator JV Ejercito said in a press conference at the Senate on Tuesday.

Ejercito said this practice of revenue agents was revealed to him in a conversation with the foreign envoys and businessmen two years ago on the bureaucratic hurdles facing local and foreign businessmen.

“If other agencies have their SOPs (standard operating procedures), in the BIR the LoA is what they use,” he said.

SOPs are the cuts or kickbacks taken by government officials, a tacit practice in government projects.  

Ejercito said that if the BIR presumedly collected P6 billion to P8 billion from LoAs, only P2 billion to P3 billion would go to the government coffers.

“Why? Because 70 percent of what was collected didn’t go in. That missing part went into the BIR agents’ pockets. Only 30 percent went to the government. That’s why from a P6-billion target, they only raise around P2 billion. It’s saddening that almost all agencies, not just the DPWH, have their own schemes,” he said. 

“I’ve spoken to many people, local businessmen who, as early as two years ago, were already complaining. Even their financial records of past fiscal years, which had already been cleared, were suddenly being reopened through LoAs,” he told reporters.

The lawmaker maintained that even if the LoA promotes revenue generation, this should not be a source of corruption for BIR employees, including revenue officers down to the regional directors.  

“We support any revenue-generating measures by government agencies like the BIR. But it shouldn’t be abused. We have to strike a balance, as this would not send a good signal,” the senator explained.

Legal but weaponized

Former BIR commissioner Kim Henares said that while LoAs are legitimate documents, they can be weaponized without any control measures, such as setting policies on who you can audit.

“Normally, it is applied when there’s a big discrepancy in tax payments. When you get audited, it doesn’t mean you did anything wrong,” Henares explained.

“What triggers a LoA must be a question, for instance, on the withholding tax, such as not reporting it. The reason for issuing an LoA must be written correctly. What I don’t understand is that, according to what I heard, the LoAs are issued three times a year,” Henares said.

“If you keep auditing businesses, they may not generate revenue. So how will they pay taxes?” Henares pointed out.

Ejercito said policies for both local and foreign investments should be clear-cut, and safeguards must be provided to prevent abuse. 

“It’s disheartening. At the very least, I’m not condoning it, but at least more should go to the government,” he said.

He said he has reached out to the new BIR commissioner, Charlito Martin Mendoza, who on Monday ordered the immediate suspension of all field audits and other related operations, including the issuance of LoAs and Mission Orders (MO), effective immediately, in accordance with Revenue Memorandum Circular 107-2025. 

“The current BIR commissioner is new. That’s why when I raised the issue, I brought it to his attention so he could fix it. I told him to fix it and put the necessary safeguards and safety nets in place so that it wouldn’t be abused,” Ejercito said.

Bad signal

He warned that the foul scheme would turn off potential investors. “Our stock market is down, and our investments are going out. Then they hear about this kind of modus in our BIR? Who would still invest here? It doesn’t send a good signal,” Ejercito said.

Also on Tuesday, Finance Secretary Frederick Go said he had ordered the suspension of the issuance of LoAs and mission orders to allow for a “careful and comprehensive review” of the policies governing BIR audit operations.

The move comes after multiple reports of taxpayer harassment.

LoA policy review backed

The country’s biggest trade group, the Philippine Chamber of Commerce and Industry (PCCI), commended the suspension of all field audits and related operations by the BIR. 

This move provides crucial and immediate relief to businesses, especially micro, small and medium enterprises, by granting them breathing room to better focus on year-end priorities such as strategic planning, inventory management, and holiday season sales without the added pressure of a BIR audit.

The PCCI particularly lauded the BIR’s establishment of a Technical Working Group to review and update the bureau’s policy frameworks on the issuance and implementation of LoAs and other audit procedures. 

The PCCI said it sees this as an essential opportunity to improve guidelines, strengthen internal controls, and ensure that the audit system fully aligns with established rules and the principles of due process.