Affirming tax exemptions on FCDUs

In this world nothing is certain except death and taxes — Benjamin Franklin. This is especially true in the settlement of the estate of a deceased person which requires the concomitant payment of estate taxes. However, what if the deceased left foreign currency deposits — are they still subject to estate taxes?

This is what the Supreme Court recently ruled on in the case of CIR v. Estate of Mr. Charles Marvin Romig (G.R. No. 262092, 9 October 2024).

In this case, Mr. Romig, an American national, died intestate in the Philippines in November 2011. Thereafter, his sole heir filed an Affidavit of Self-Adjudication to claim his properties, including a US dollar savings account with Hongkong and Shanghai Banking Corporation (HSBC).

The estate filed an Estate Tax Return paying P26,152 in estate taxes and simultaneously requested a confirmatory ruling from the Bureau of Internal Revenue (BIR) regarding the tax exemption of the HSBC account under the Foreign Currency Deposit Act of the Philippines.

Later, the estate filed an Amended Estate Tax Return, paying an additional P4,565,349.07 in taxes on the HSBC account. However, the estate filed a claim with the BIR for a refund alleging that it had erroneously paid the estate tax, including interest and penalties.

The Commissioner of Internal Revenue asserted that Mr. Romig’s HSBC USD Savings Account was subject to an estate tax because it did not meet the conditions as an allowable deduction under Section 86(A) of the 1997 National Internal Revenue Code (NIRC) and that the tax exemption for Foreign Currency Deposit Units (FCDUs) under Republic Act (RA) 6426 was revoked with the enactment of the 1997 NIRC.

On the other hand, the estate countered that Section 6 of RA 6426, which grants tax exemptions for foreign currency deposits, had not been explicitly repealed by the 1997 NIRC. The Supreme Court ruled in favor of the estate of Mr. Romig and held that foreign currency deposit accounts under the Expanded Foreign Currency Deposit System (EFCDS) were exempt from the estate tax upon the depositor’s death.

The Court traced back the origin and purpose of the tax exemption. It explained that RA 6426 was specifically enacted to encourage foreign currency deposits in the Philippines, with tax exemptions to attract foreign investments considering the unstable financial condition caused by heavy dollar spending, which resulted in a dollar deficit.

Section 6 of the Act clearly exempted foreign currency deposits, including interest and earnings, from any taxes, regardless of whether the depositors were residents or non-residents.

On the other hand, while the NIRC governs estate taxes, it does not contain any explicit provision that repeals the tax exemption for foreign currency deposits under RA 6426. The Court emphasized that it is a fundamental rule in statutory construction that between a general law and a special law, the latter prevails because a special law reveals the legislative intent more clearly than a general law does. Thus, the tax exemption for FCDUs under RA 6426 remained valid.

This ruling has significant implications for individuals with foreign currency deposits in the Philippines. It highlights that the law does not provide any mechanism for taxing these deposits upon death. Since estate tax liabilities are computed based on the assets that can be lawfully accessed and disclosed, foreign currency deposits remain beyond the reach of estate tax assessments. It confirms that these deposits remain protected even after the depositor’s death, making them a potential estate planning tool for preserving wealth.

However, since the law prioritizes confidentiality, heirs and executors of estates may also face challenges in accessing such accounts without the necessary documentation or court intervention. Those involved in estate planning should consider consulting legal and financial experts to navigate these complexities.

For more of Dean Nilo Divina’s legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cad@divinalaw.com.