Totalization Agreements are bilateral agreements between the United States (US) and other countries. The purpose of the Agreements is to avoid double taxation of income (in both the home and host location) for social security tax purposes (FICA tax in the US). Under the Agreements the employee is exempt from social tax in the host country and continues to pay social tax in the home country. The Agreements also provide an employee the possibility of uninterrupted funding of their social security benefits while working abroad.
Note - While some people refer to the Agreements as Social Security Tax Treaties, these Agreements should not to be confused with Income or Estate and Gift Tax Treaties that are enacted to address specific kinds of taxes.
Certain requirements must be met to be eligible to claim the benefits under the respective Agreements. Generally, all Agreements require that those eligible for totalization benefits be current employees and that their assignments be temporary in duration (for a period of five years or less). The eligibility requirements vary by Agreement. Consequently, each pertinent Agreement should be reviewed to determine the specific requirements to be met. The text of each Agreement can be found on the US Social Security Administration´s website at: www.socialsecurity.gov/international/agreement_descriptions.html
To claim benefits under any US Totalization Agreement, a certificate of coverage (discussed below) must be obtained from the home country social security agency. The certificate, once received, is then given to the host country employer so social taxes are not withheld in the host location. In the US, the certificate remains on file with the employer. It is not sent to the IRS.
While the focus of this newsletter relates to US Totalization Agreements, other bilateral and multilateral international social security agreements exist for multinational companies with non-US employees working outside their home country. Information relative to these agreements can be obtained by visiting the social security sites of those respective countries.
Why should my company bother with filing a certificate of coverage?
As was noted above, obtaining and submitting a certificate of coverage is required to claim the benefits allowed under the various US Totalization Agreements. Without the certificate of coverage, the host location must withhold social taxes from the international assignee. In addition, where the employee remains on the home country payroll, home country social taxes will also have to be paid. In effect the individual will pay social taxes twice - once in their country of origin, and then in the country where the work is to be performed.
If an employer tax equalizes an employee, failure to obtain a certificate of coverage can add significant tax costs to an international assignment for the following reasons:
- Social taxes in many countries outside the US are often higher than those paid in the US
- Social taxes in the host country that are covered by a Totalization Agreement are not deductible or creditable. This can increase the actual overall tax cost related to an international assignee.
- The length of a temporary assignment is generally not of sufficient length to allow an individual to accumulate the credits necessary to claim host country social security benefits.
The process for obtaining a certificate of coverage for a US expatriate is very easy and can be expedited via the Internet. You can complete the application at www.socialsecurity.gov/coc. Once obtained, the approved certificate of coverage must be provided to the payroll administrator in the host location.
Similarly, a certificate of coverage must be obtained from a US-inbound assignee´s home country social security administration and provided to the US employer´s payroll administrator. If a home country agency will not issue a certificate of coverage, then a statement must be obtained from the US social security administration indicating the individual is not subject to US social security taxes under the particular totalization agreement (pursuant to IRS Rev. Proc. 84-54).
Should you have international employees located in totalization countries, review your payroll files to confirm that all your certificates of coverage are valid. Pay particular attention to the end date to verify that the certificate of coverage has not expired. If you do not have a valid certificate of coverage on file, contact the US Social Security Administration. In certain circumstances coverage can be received retroactively. If you are unsure of your compliance requirement, consult with your tax service provider or contact the US Social Security Administration. Recent increases in payroll audits have resulted in more scrutiny in this area.
