Foreign Deposit Accounts: Are They Exempt From Estate Tax? - ALBURO ALBURO AND ASSOCIATES LAW OFFICES

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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

AT A GLANCE:

Republic Act No. 6426 is a special law created particularly for foreign currency deposits in the Philippines, with the goal of attracting deposits from foreign lenders and investors. Pertinently, Section 6 thereof state:

Section 6. Tax Exemption. – All foreign currency deposits made under this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034, including interests and all other income or earnings of such deposits, are hereby exempted from any and all taxes whatsoever irrespective of whether or not these deposits are made by residents or non-residents so long as the deposits are eligible or allowed under aforementioned laws and, in the case of non-residents, irrespective of whether or not they are engaged in trade or business in the Philippines. (As amended by Presidential Decree No. 1246, prom. November 21, 1977)

In the recently decided case of Commission of Internal Revenue vs. Estate of Mr. Charles Marvin Romig, G.R. No. 262092, October 9, 2024, the Supreme Court reiterated the well-settled principle 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.

FACTS: Charles Marvin Romig (Romig) was an American national who died intestate in the Philippines on November 20, 2011. At the time of his death, Romig was a resident of Aguada, Poblacion, Puerto Galaera, Oriental Mindoro.

In March 2012, Maricel Romig (Maricel), the decedent’s sole heir and representative of the Estate of Romig (Estate), executed an Affidavit of Self-Adjudication, adjudicating to herself the properties of the decedent at the time of his death, including a dollar deposit at the Foreign Currency Deposit Unit (FCDU) of Hongkong and Shanghai Banking Corporation (HSBC) Limited, HSBC Premiere-Makati Branch (HSBC USD Savings Account).

In May 2012, the Estate filed an Estate Tax Return and paid the estate tax due thereon amounting to PHP 26,152.00. On even date, the Estate submitted a letter to the Law and Legislative Division of the Bureau of Internal Revenue (BIR) National Office requesting for a confirmatory ruling that the HSBC USD Savings Account is exempt from estate tax and all other taxes, in accordance with Section 6 of R.A. No. 6426, as amended, otherwise known as the Foreign Currency Deposit Act of the Philippines.

On June 30, 2015, the Estate filed an Amended Estate Tax Return and paid additional estate tax on the HSBC USD Savings Account amounting to PHP 4,565,349.07.

On June 28, 2017, the Estate filed before the BIR an administrative claim for refund of erroneously paid estate tax amounting to PHP 4,565,349.07, including interests and penalties, on the HSBC USD Savings Account. The Estate also filed before the CTA a Petition for Review, in view of the two-year statute of limitations under Sec. 229 of the 1997 National Internal Revenue Code (NIRC).

In its Answer, the CIR interposed the following defenses:

The Estate is not entitled to the refund of the alleged payment of estate tax for the transfer of the foreign currency deposits of the heir of Romig;
The decedent is an American citizen but a resident of the Philippines. Hence, all the properties of the decedent wherever situated is subject to estate tax;
Given that a foreign currency deposit of a resident decedent is not among those enumerated as allowable deductions from the gross estate under the Sec. 86 (A) of the 1997 NIRC, such should be subject to estate tax;
The alleged exemption under Sec. 6 of the Foreign Currency Deposit Act interposed by the Estate is not among those enumerated under Sec. 87 of the 1997 NIRC as exempted from estate tac; and
The Petition should be dismissed for failure on the part of the Estate to exhaust administrative proceedings.

In its Decision dated September 2, 2019, the CTA Second Division granted the Estate’s Petition for Review and ordered the CIR to refund or issue a Tax Credit Certificate in favor of the Estate in the amount of PHP 4,565,349.07.

According to the CTA Second Division, the Estate is entitled to a refund of erroneously paid estate tax given that: (1) the Estate filed its administrative and judicial claims for refund within the two-year period provided under the 1997 NIRC; and (2) the tax exemption of foreign currency deposits under Sec. 6 of R.A. No. 6426, as amended, has not been revoked by the 1997 NIRC.

It held that between the provisions of R.A. No. 6326, a special law that took effect in 1972, and the provisions of the 1997 NIRC, a general law, the former necessarily prevails. This is in keeping with the rule on statutory construction that a later law, general in terms and not expressly repealing or amending a prior special law, will not ordinarily affect the special provisions of the earlier statute. The CTA Second Division ruled that the Estate can claim for a refund on the estate tax since R.A. No. 6326 is the governing law on the exemption from estate tax on foreign currency deposits.

The CIR moved for reconsideration but the same was denied by the CTA Second Division for lack of merit. Aggrieved, the CIR appealed before the CTA En Banc.

The CTA En Banc effectively affirmed the ruling of the CTA Second Division. While the CTA En Banc agreed with the CTA Second Division that the Estate duly filed its administrative and judicial claims for refund within the two-year period counted from the date of payment of tax, it nevertheless held that the HSBC USD Savings Account is not exempt from estate tax. It ruled that the reliance on R.A. No. 6426 for the exemption on estate tax is misplaced because the said law pertains to income tax, which is separate and distinct from estate tax. The CTA En Banc concluded that there was no erroneous payment of estate taxes and that the foreign currency deposit of the decedent was correctly and legally included in the latter’s net estate subject to estate tax, hence, the instant claim for refund should be denied.

However, since only three Associate Justice concurred with the opinion of the ponencia during the deliberations of the case, the CTA Second Division’s rulings stood affirmed.

Dissatisfied, the CIR filed a Motion for Reconsideration. In its Resolution, the CTA En Banc ruled that R.A. No. 6426 remains the governing law on the exemption from estate tax of foreign currency deposits. The CTA En Banc concurred with the CTA Second Division’s finding that the provisions of the 1997 NIRC, as amended which is a general law on national internal revenue taxes, cannot impliedly repeal R.A. No. 6426, a special law, which governs the foreign currency deposit system in the Philippines. Consequently, it also held that the Estate had the right to recover the amount of PHP 4,565,349.07 representing the estate tax, including interest and penalties, that it had erroneously paid to the government.

ISSUE: Whether the decedent’s foreign currency deposit with HSBC is exempt from estate tax.

RULING: Yes. The Decedent’s HSBC USD Savings Account is exempt from estate tax pursuant to Republic Act No. 6424, as amended.

Prior to its passage in 1972, one of the country’s main economic challenges was the unstable financial condition caused by heavy dollar spending, which resulted in a dollar deficit. To address this problem and to likewise increase the country’s reserves, the government encouraged foreign currency deposits in duly authorized banks in order that these may be put into the stream of the banking system. Towards this end, Republic Act No. 6426 provided tax exemptions and incentives to FCDU deposits, as well as banks and financial institutions having FCDU license.

Meanwhile, the 1997 NIRC is a general law that governs the imposition of national internal revenue taxes, fees, and charges. Among the taxes imposed by the 1997 NIRC is estate tax, which is a tax on the right of a decedent to transmit his or her estate to the lawful heirs and beneficiaries at the time of death. Under Sections 84 and 85, estate tax shall be levied, assessed, collected and paid upon the transfer of the net estate of every decedent, whether resident or non-resident of the Philippines, based on the value of such net estate, by including the value at the time of the decedent’s death of all property, real or personal, tangible or intangible, wherever situated.

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. Moreover, a special law cannot be repealed or modified by a subsequently enacted general law in the absence of any express provision in the latter law to that effect. A special law must be interpreted to constitute an exception to the general law in the absence of special circumstances warranting a contrary conclusion.

A perusal of the provisions of the 1997 NIRC would reveal that there is no express repeal of the grant of tax exemption for foreign currency deposits found in Republic Act No. 6426.

Based on the foregoing, it then becomes apparent that the decedent’s HSBC USD Savings Account is governed by the provisions of Republic Act No. 6426 and is therefore exempt from any and all taxes, including the estate tax. Hence, the Supreme Court upheld the ruling of the CTA En Banc that the Estate has the right to recover the amount of PHP 4,565,349.07 representing the estate tax that it had erroneously paid to the government.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 0917-5772207/ 09778050020.

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