Totalization Agreements

Since the late 1970s, the U.S. has entered into international social security agreements, commonly known as totalization agreements, with several countries that also have social security programs; see the Exhibit below. It also is in the process of negotiating such agreements with Argentina and Japan. The key purpose of totalization agreements is to eliminate double social security taxation, often levied on a U.S. citizen or resident working in a foreign country or on a foreign national working in the U.S.

Without the coordination of social security coverage, U.S. multinational companies and their employees run into a dual-coverage problem, as many countries impose social security contributions on anyone working in their territory. U.S. Social Security covers both expatriate and inpatriate workers. Such coverage is compulsory for services provided within U.S. boundaries, regardless of the citizenship or residency status of the employee or employer. This also includes nonresident aliens working in the U.S., regardless of their length of stay.

Besides eliminating dual social security coverage, another primary objective of totalization agreements is to cover workers under the system to which they anticipate having long-term ties, during both their working life and after retirement. The agreements do not give workers an option to elect their system of choice; rather, they only provide an exemption from one countrys system to eliminate dual coverage.

Each agreement follows a basic territoriality rule, under which a worker is subject to the coverage of the country in which he or she is performing services. However, an employee who expects to have a host-country assignment lasting for less than five years can remain covered by the country from which he or she has transferred. This detached-worker rule applies only if the worker continues to work for the same employer in the foreign country or for one of its foreign affiliates, provided that the U.S. employer has entered into a Sec. 3121(i) agreement for its foreign affiliate. The detached-worker rule is included in all existing U.S. agreements, except the Italian one. The Italian agreement bases the coverage and benefit contributions on nationality.

The agreements also eliminate dual coverage of self-employment (SE) taxes. Most agreements use a residence rule to determine social security taxes. Although the agreements with Belgium, France, Italy and Germany depart from this rule, each of those agreements includes a provision eliminating the dual coverage of SE taxes. In general, employers should request a Certificate of Coverage from the country of coverage on behalf of employees. Self-employed persons can request the certificate on their own behalf. The request should include the following information:

• The employers name and address in the U.S. and the other country;

• The workers full name;

• The workers place and date of birth;

• The workers citizenship;

• The workers U.S. and foreign social security numbers;

• The workers place and date of hiring; and

• The beginning and ending dates of a foreign country assignment.

Self-employed persons should indicate their country of residence and the nature of their SE activity. When requesting certificates under the agreement with France, the employer (or self-employed person) must also certify that he or she (and any accompanying family members) is covered by health insurance. Once the certificate is issued by the Social Security Administration, it should be presented to the appropriate foreign authorities to entitle the worker to the foreign exemption from social security taxes.

Conclusion

Totalization agreements benefit persons working now and those whose working careers are over. For current workers, the agreements eliminate dual social security contributions. For persons who have worked both in the U.S. and abroad, and who are now retired, disabled or deceased, agreements result in benefits to which the worker or his or her family would not have otherwise been entitled. Interested parties can obtain more information about totalization agreements at the Social Security Administrations website, at www.SSA.gov.

From Sadia Nazir, CPA, MST, Oak Brook, IL