Parental love is one of the strongest and most selfless forces in the world. Having experienced this love through my own parents, who have always been there to support and nurture me, I now find myself, as a parent, driven by the same desire to care for and protect my child. This influence extends to every decision I make, particularly those concerning financial security and inheritance. My hope is that my dedication will transcend life’s limitations, allowing me to provide for my child even after I am gone. This enduring love naturally intersects with practical matters like estate planning and tax considerations, which are crucial to ensuring that the legacy we leave behind is secure and beneficial for our loved ones.
Estate planning ensures that our beneficiaries enjoy the fruits of our labor without unnecessary burdens. An essential aspect is understanding how estate taxes impact wealth transfer. In the Philippines, the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on Jan. 1, 2018, fixed the estate tax rate at 6% of the net estate’s value. This change aimed to simplify the estate tax process, making it more predictable and manageable for families.
Under the current Philippine tax rules, a decedent’s gross estate comprises all properties wherever situated, including real properties, personal property, tangibles, and intangibles. However, for non-resident aliens, only properties situated in the Philippines are included. With respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity. This means that estate planning can become quite complex, particularly for families with assets in multiple jurisdictions.
Alongside this fixed rate, the TRAIN Law introduced modifications to standard deductions and specific exemptions applicable in determining the net estate. Although these adjustments streamline the wealth transfer process, heirs must remain vigilant in comprehending the allowable deductions and exemptions to accurately assess the net estate value.
In 2024, a Supreme Court case addressed an issue concerning estate taxes and foreign currency deposits. The case involved the estate of a deceased person, for which the sole heir and representative, along with the estate itself, had already paid the estate tax. However, the estate subsequently claimed that the deceased’s foreign currency deposit in a Foreign Currency Deposit Unit (FCDU) of a bank was erroneously subjected to estate tax. The estate argued that these deposits should have been exempted under Republic Act (RA) No. 6426, as amended by Presidential Decree Nos. 1034 and 1035, collectively known as the Foreign Currency Deposit Act of the Philippines.
Issued in 1974, the Foreign Currency Deposit Act primarily aimed to encourage the inflow and retention of foreign currency deposits within the Philippine banking system. It was designed to attract foreign currency deposits from both Filipino citizens and foreigners by offering a secure and favorable banking environment. One of the major incentives is the exemption of foreign currency deposits from all forms of taxation, including income tax, estate tax, and other national internal revenue taxes. This exemption was intended to make foreign currency deposits more attractive to potential depositors.
In its counterargument, the Bureau of Internal Revenue (BIR) asserted that estate tax should apply to these foreign currency deposits, claiming that the exemption granted under RA No. 6426 was implicitly repealed by the 1997 National Internal Revenue Code. This is because it is neither listed as an allowable deduction for estate taxes nor included among the acquisitions and transfers exempt from estate taxes under the Tax Code.
The Supreme Court, however, upheld that foreign currency deposit accounts are exempt from all taxes, including estate tax, under RA No. 6426. This ruling underscored the principle that as a special law regulating the foreign currency deposit system and detailing exemptions and incentives, the specific provisions of the Foreign Currency Deposit Act take precedence over the broader provisions of the 1997 Tax Code concerning national internal revenue taxes. The Court determined that the 1997 Tax Code, as a general tax law, cannot nullify or alter the specific exemptions provided by RA No. 6426 without a clear and explicit provision stating its repeal.
The landmark ruling highlights the fundamental rule in statutory construction that, when there is a conflict between a general law and a specific law, the specific law takes precedence because it more clearly reflects the legislative intent.
By reaffirming the tax-exempt status of foreign currency deposits under the Foreign Currency Deposit Act, the Supreme Court provided clarity and reassurance for families navigating the intricate landscape of estate taxation in the Philippines. It has also reinforced the agenda of a 50-year-old piece of legislation enticing people to invest in foreign currency.
The profound impact of parental affection goes beyond nurturing and protection in this life. It intertwines with critical financial decisions that we make today that affect the value of the gifts we will leave behind. The Supreme Court case serves as a pivotal reminder of the complexities inherent in estate planning and the importance of understanding nuances in tax law that can help preserve our legacy and reflect our enduring dedication to the well-being and prosperity of future generations.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Maryjane Almira Kau Chong is an assistant manager at the Tax group of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network.