Foreign currency deposits are exempt from estate taxes

In the Philippines, foreign exchange transactions—particularly the buying of foreign currencies—are regulated.

Individuals who are not engaged in business activities that require foreign currency transactions for their operations may find it difficult to purchase foreign currency from banks or official channels.

Regulations allow banks and authorized financial entities to sell foreign currency only for specific non-trade transactions, such as education, medical expenses, travel expenses, and the salaries of foreign expatriates, to name a few.

For example, a bank will not sell US dollars to a depositor to settle the payment of a dollar-denominated credit card, as this is not considered an allowable purpose under current regulations.  The cardholder will have to purchase its US dollars from the black market or money changer shops which may be more lenient enforcing strict regulations in selling foreign exchange.

While foreign currency transactions are regulated, foreign currency bank accounts are also treated differently from peso-denominated bank accounts.

In a previous article, we discussed how foreign currency deposits in banks are afforded greater protection under Philippine law.

These types of deposits are subject to fewer exceptions to the Bank Secrecy Law and are also shielded from attachment, garnishment, or any other legal process by any court, legislative body, government agency, or administrative body—protections not granted to peso bank accounts. (“Foreign Currency Bank Accounts Offer More Protection,” For Law’s Sake, February 28, 2024, www.inquirer.net)

The law governing foreign currency deposits is the Foreign Currency Deposit Act, or Republic Act No. 6426, as amended (RA 6426).

This law was passed in 1972 at a time when 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, the country sought to encourage foreign currency deposits in authorized banks so that these could be injected into the Philippine banking system.

In addition to the protections already mentioned, the Supreme Court in a recent case confirmed that foreign currency deposit accounts in authorized Philippine institutions are exempt from the estate tax. (Commissioner of Internal Revenue v. Estate of Charles Marvin Romig, GR 262092, October 9, 2024).

In that case, Charles Marvin Romig, an American and resident of Puerto Galera, Oriental Mindoro, died without a will on November 20, 2011.

Maricel Romig, declared that she was his sole heir and adjudicated to herself Charles’ properties at the time of his death which included a US dollar savings deposit account with the Hongkong and Shanghai Banking Corporation (HSBC) Makati Branch.

The estate of Charles initially paid an estate tax of PhP26,152 while requesting confirmation from the Bureau of Internal Revenue (BIR) that the US dollar savings account at HSBC was exempt from the estate taxes in accordance with RA 6426.  While waiting for the BIR to decide, to avoid penalties and interest, the estate decided to pay estate taxes on the US dollar deposits in the amount of P4,565,349.07.

Subsequently, the Estate of Charles filed a claim for refund with the BIR on the estate taxes paid on the US dollar savings account, claiming that it was exempt from estate tax.  Without waiting for the BIR to decide the claim, the estate also filed a petition for refund with the Court of Tax Appeals (CTA).

To support its petition for refund, the estate of Charles cited Section 6 of RA 6426 which provides that “All foreign currency deposits made under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. 1034, including interest 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 nonresidents, so long as the deposits are eligible or allowed under the aforementioned laws, and in the case of nonresidents, irrespective of whether or not they are engaged in trade or business in the Philippines.” (As amended by Presidential Decree No. 1246, 1977).

On the other hand, the BIR opposed the refund arguing that the US dollars in the HSBC account were not an allowable deduction under the Tax Code, that the money was not among the acquisitions and transmissions not subject to estate tax under the 1997 National Internal Revenue Code (Tax Code) and that the tax exemption under RA 6426 had been revoked upon the enactment of the Tax Code in 1997.

The BIR cited Section 291 of the Tax Code to support its claim that the tax exemption under RA 6426 was revoked which provides that “All laws, decrees, executive orders, rules and regulations, or parts thereof, which are contrary to or inconsistent with the Code, are hereby repealed, amended, or modified accordingly.”

In resolving the petition filed by the estate of Charles, the CTA and the Supreme Court declared that RA 6426 remains the governing law on the exemption from estate tax of foreign currency deposits therefore the US dollar deposit of Charles in HSBC Makati was exempt from the payment of estate taxes.  Accordingly, the BIR was ordered to refund the estate of Charles the amount of PhP4,565,349.07.

The Courts explained that the Tax Code did not revoke the exemption provided by RA 6426 since it is a special law whereas, the Tax Code is a general law on internal revenue taxes.

The Courts noted that it is a fundamental rule in statutory construction that between a general law and a special law, the special law prevails because it 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 general law to that effect. Accordingly, a special law must be interpreted as constituting an exception to the general law in the absence of special circumstances warranting a contrary conclusion.

It is of note that the latest amendment to the estate tax provisions in the Tax Code is Republic Act No. 10963 or the TRAIN Law, which took effect on January 1, 2018.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at jcs@tiongcosiaobellolaw.com. The views expressed in this article belong to the author alone.)