The Benefits of Social Security Totalization Agreements

by John Anthony Castro, J.D., LL.M.

Introduction

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Background

The President of the United States may enter into agreements establishing totalization arrangements between the U.S. social security system and the social security system of any foreign country for the purposes of establishing entitlement to and the amount of old-age, survivors, disability, or derivative benefits based on a combination of an individual’s periods of coverage under the U.S. social security system and the social security system of such foreign country.[1]

On or after the effective date of the agreement, to the extent that employment or self-employment (or service recognized as equivalent) under the U.S. social security system or foreign system is covered under the agreement, the agreement will provide that the work or equivalent service be subject to payment of contributions or taxes under only one system. The system under which contributions or taxes are to be paid is the system under which there is coverage pursuant to the agreement.[2]

A U.S. employer is relieved of its obligation to make payments under a foreign affiliate employee coverage agreement, with respect to services performed by U.S. citizens or residents employed by a foreign affiliate, when it enters into a totalization agreement with the foreign country where such services are performed, under which agreement the wages of such employees working for the foreign subsidiary in the foreign country become subject to taxes for social security purposes under the social security system of the foreign country.[3]

The provision of the Social Security Act allowing for totalization of the periods of coverage for an individual under the social security systems of the United States and a foreign country is permissive; it does not require that all periods of United States and foreign coverage should be combined.[4]

Required Provisions of Totalization Agreements

Any agreement establishing a totalization arrangement must provide:

(1) that in the case of an individual who has at least six quarters of coverage under the U.S. social security system and periods of coverage under the social security system of a foreign country which is a party to the agreement, those periods of coverage may be combined with periods of U.S. coverage and may be considered for purposes of establishing entitlement to, and the amount of, U.S. social security benefits;[5]

(2) that employment or self-employment, or any recognized equivalent service, must, on or after the effective date of the agreement, result in a period of coverage under either the U.S. social security system or the foreign system, but not under both;[6] and the methods and conditions for determining under which system employment, self-employment, or other service will result in a period of coverage;[7] and

(3) that where an individual’s periods of coverage are combined, the U.S. social security benefit payable must be based on that proportion of the individual’s periods of coverage that was completed under the U.S. social security system.[8]

In addition, a totalization agreement may provide: (1) that an individual who is entitled to U.S. social security benefits may receive them while he or she resides in a foreign country which is a party to the agreement, regardless of the nonpayment provisions with respect to aliens residing abroad;[9] and (2) other provisions that are not inconsistent with other provisions of the Social Security Act and which the President deems appropriate to carry out the purposes of the totalization provisions.[10]

An agreement may not provide for combining periods of coverage under more than two social security systems.[11]

Each agreement must contain provision for its possible termination. If an agreement is terminated, entitlement to benefits and coverage acquired by an individual before termination will be retained. The agreement will provide for notification of termination to the other party and the effective date of termination.[12]

Countries With Which the U.S. May Enter Into Agreements

The United States will only enter into totalization agreements with countries having an appropriate social security system.[13] The term “social security system” means, with respect to a foreign country, a social insurance or pension system which is of general application in the country and under which periodic benefits, or their actuarial equivalent, are paid on account of old age, disability, or death.[14] To negotiate with the national government of the foreign country, its social security system must be in effect. This means the system is collecting social security taxes or paying social security benefits.[15]

Countries With Which the U.S. Currently has Agreements

The U.S. has currently has totalization agreements with Australia, Austria, Belgium, Brazil, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland, the U.K., and Uruguay. You can access the full texts of each agreement by clicking here.

Coverage Restricted to Country Wherein Worker is Employed or Self-Employed Resides

While particular agreements may vary on coverage rules, the Social Security Administration (SSA) has set forth general principles for precluding dual coverage.[16] An agreement precludes dual coverage by assigning responsibility for coverage to the U.S. or a foreign country, and an agreement may modify the coverage provisions of Title II of the Social Security Act to accomplish this purpose.[17] Generally, if the work would otherwise be covered by both countries, an agreement will exempt it from coverage by one of the countries.[18] An agreement will provide that a worker will be covered by the country in which he or she is employed and will be exempt from coverage by the other country,[19] but it may provide exceptions so that a worker will be covered by the country to which he or she has the greater attachment.[20]

If a national of either the United States or the other country resides in one country and has self-employment income that is covered by both countries, the agreement will provide that the person will be covered by the country in which he or she resides and will be exempt from coverage by the other country.[21] A person resides in a country in which he or she has established a home intending to remain there permanently or for an indefinite period of time.[22] Generally, a person will be considered to have established a home in a country if that person assumes certain economic burdens, such as the purchase of a home or establishment of a business, and participates in the social and cultural activities of the community.[23] Once residence has been established, it may continue even if the person leaves the country for six months or less.[24] Residence may be considered to continue if the absence is for more than six months only if there is sufficient evidence establishing that the person intends to maintain the residence, such as maintaining a home or apartment in that country, the departure from the country with a reentry permit, or the existence of a business or family associations sufficient to warrant the person’s return.[25]

Agreements may provide for variations from the general principles for precluding dual coverage to avoid inequitable or anomalous coverage situations for certain workers. However, in all cases, coverage must be provided by one of the countries.[26]

Exception from Coverage Rules for Persons Temporarily Working Abroad

The basic exception under most totalization agreements from the rule that an individual working in a country is subject to the coverage laws of that country is if a worker is temporarily working in the second country, he or she remains subject to the coverage rules of the first country; such workers are generally considered to be temporarily in the country where they are working if the employment in the other country is expected to last no longer than five years.[27] However, this five-year period may be extended, upon request to the appropriate agency and upon agreement by both countries.[28]

In the case of Italy, any work performed by a U.S. national that is covered under the Social Security Act remains covered but is exempt from Italian coverage.[29] An Italian national or a dual (U.S./Italian) national must elect coverage under either the U.S. or Italian system.[30]

Other Exceptions from Coverage Rule

Special exceptions from coverage are written into most totalization agreements with regard to government employees and maritime or air transportation employees. With respect to government employees, the agreements provide that the categories of persons mentioned in the Vienna Conventions on Diplomatic Relations, governing members of the staff of a diplomatic or consular mission, are not affected by the coverage provisions of the agreement.[31] That is, a person who is employed by the government of one country and is sent to the other country is covered by the country that employs him or her, while a person who is hired locally to work for a government will generally be covered in the country in which the employment takes place.[32]

Exceptions for coverage also apply to maritime and air transportation workers.[33] The rule of exception may vary according to the agreement. Thus, a person may be subject to coverage depending on the flag that the ship on which he or she works flies or where the air transport business for which he or she works is headquartered,[34] or where the person resides.[35]

All agreements contain a provision for a request for special exceptions. These provisions are intended for unforeseen situations and both countries must agree that the worker must remain covered by one of the countries. The applicant may apply to either of the two countries, but must convince the two countries that an exception is appropriate.[36]

Obtaining an Exemption from Social Security Taxes Under Totalization Agreements

Under some agreements, proof of coverage under one social security system may be required before the individual may be exempt from coverage under the other system.[37] Requests for certificates of coverage under the U.S. system may be submitted by the employer, employee, or self-employed individual to the Social Security Administration (SSA).[38]

A certificate of coverage serves as proof that the worker identified on the certificate is covered in the country which issued the certificate and is, therefore, exempt from social security taxes in the other country for the period noted on the certificate.[39]

The information needed for the issuance of a certificate from either the U.S. or the foreign country with which the U.S. has entered into a totalization agreement depends on the terms of the agreement, but usually includes: (1) the full name of the worker; (2) the date and place of birth; (3) the country of citizenship; (4) the country of the worker’s permanent residence; (5) the U. S. social security number; (6) the individual’s social security number or equivalent insurance number from the foreign country; (7) the nature of activity (if self-employed); (8) the name and address of the employer or self-employment activity; and (9) the beginning and ending date of employment or self-employment in the other country.[40]

The Social Security Administration sends duplicate copies of the certificates of coverage it issues on behalf of qualified U.S. workers to the requesting U.S. employers and it is the employers’ responsibility to make a copy available to the tax authorities in the other country, if requested to do so, in order to prove the workers’ foreign tax exemption.[41]

Obtaining an Exemption from FICA Taxes Under Totalization Agreements

To substantiate an exemption from both employer and employee Federal Insurance Contributions Act (FICA) taxes where wages are subject to taxes under a foreign social security system and coverage under that foreign system is selected under a totalization agreement between the United States and a foreign country, an employer must obtain a certificate of coverage from a duly authorized official or agency of the foreign country.[42] The certificate of coverage must show: (1) the employee’s name and, if available, his or her address and taxpayer identification number; (2) the employer’s name, address, and taxpayer identification number, if any; (3) the existence of an agreement between the foreign country and the U.S. under which wages received by or paid to the employee are subject to the foreign country’s social security tax; and (4) the date on which the agreement became applicable and its termination date, if a termination date has been determined.[43]

No particular form is prescribed for the certificate, which should be retained in the employer’s files.[44] A certificate is evidence of an exemption from FICA taxes and should be available if the IRS questions why taxes were not withheld. The exemption from the FICA taxes applies to wages paid on and after the effective date of the totalization agreement.[45]

The certificate of coverage is a certification that the person named on the certificate is subject to the social security laws of the country issuing the certificate and exempt from coverage in the other country.[46] A certificate of coverage issued by another country serves as proof that the designated worker is exempt from U.S. social security coverage and taxes.[47] If the worker is an employee, the foreign certificate should be retained in the office of the U.S. employer in case the IRS questions why the company is not withholding and paying FICA taxes for the worker.[48]

If the foreign country will not issue the requisite statement, an employer or employee should secure a statement issued by the SSA Office of Research, Statistics, and International Policy, stating that the employee’s wages for a particular period, including the beginning date and, if determined, the ending date, are not covered by the U.S. social security system.[49]

Substantiating Exemption from SECA Taxes Under Totalization Agreements

To substantiate an exemption from the taxes imposed by the Self-Employment Contributions Act (SECA), a self-employed individual or his or her representative[50] should obtain from a duly authorized official or agency of the foreign country involved a certificate of coverage which shows: (1) the individual’s name, address, and taxpayer identifying number; (2) the existence of an agreement between the foreign country and the U.S. under which the individual’s self-employment income is subject to taxes or contributions under the foreign country’s social security system; and (3) the date on which the agreement became applicable and its termination date, if a termination date has been determined.[51]

No particular form is prescribed for the certificate.[52] A copy of the certificate or other suitable substantiation must be attached to the individual’s federal income tax return for each year the agreement is in effect. The taxpayer should enter “Exempt, see attached statement,” on the line designated for self-employment tax liability on the taxpayer’s income tax return.[53]

The certificate of coverage is a certification that the person named on the certificate is subject to the social security laws of the country issuing the certificate.[54] The exemption applies to that portion of the taxpayer’s net earnings from self-employment that is attributable to that portion of the taxable year that occurs on or after the effective date of the agreement.[55] Thus, for a taxpayer using the cash receipts and disbursements method of accounting the SECA tax liability for the taxable year is determined by computing the taxpayer’s net earnings from self-employment for such year without regard to the exemption and then eliminating any of such amount that results from an excess of income received over deductions paid by the taxpayer on and after the date the agreement becomes effective.[56]

If a foreign country will not issue the requisite statement, the individual should secure a statement issued by the SSA Office of Research, Statistics, and International Policy, stating the individual’s earnings for a particular period, including the beginning date and, if determined, the ending date, are not covered by the U.S. Social Security System.[57]

Exchange and Disclosure of Information Under Totalization Agreements

Each totalization agreement provides that the Social Security Administration (SSA) and the social security agency in the other country party to the agreement must furnish each other with information needed to adjudicate claims filed under the agreement.[58] A routine use statement published in the Federal Register authorizes the SSA to disclose such information from designated systems of records to the social security authorities in an agreement country.[59] The SSA may provide the social security agency of an agreement country with information about an individual without obtaining the individual’s written consent, provided that the information is from one of the systems of records specified in the routine use statement published in the Federal Register and the foreign agency needs the information to adjudicate a claim filed under the agreement, or the information must be provided to the foreign agency for the SSA to obtain information it needs from that agency’s records to adjudicate a claim for U.S. totalization benefits.[60]

The SSA’s policy is that personal information that it receives from a foreign country in administering a totalization agreement is given the same protection as other sensitive personal information regarding a worker which it maintains in its records.[61] Personal information will only be disclosed if federal law specifically requires disclosure, and does not specifically prohibit such disclosure.[62] If disclosure of such information, including tax-related information, is neither specifically required nor prohibited by federal law, the principles of the U.S. Freedom of Information Act apply.[63] The public interest in maintaining the confidentiality of such information by avoiding clearly unwarranted invasions of personal privacy is also taken into account to ensure the agreement’s effective implementation.[64]

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About the Author

John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Washington DC, Miami, and Dallas.


Footnotes with Legal Authority Citations

[1] 42 U.S.C. § 433(a).

[2] 20 C.F.R. § 404.1915.

[3] Rev. Rul. 79-232.

[4] See Georgiou v. Apfel, 50 F. Supp. 2d 913 (E.D. Mo. 1999), aff’d, 242 F.3d 374 (8th Cir. 2000).

[5] 42 U.S.C. § 433(c)(1)(A).

[6] 42 U.S.C. § 433(c)(1)(B)(i).

[7] 42 U.S.C. § 433(c)(1)(B)(ii).

[8] 42 U.S.C. § 433(c)(1)(C).

[9] 42 U.S.C. § 433(c)(2).

[10] 42 U.S.C. § 433(c)(4).

[11] 20 C.F.R. § 404.1910(a).

[12] 20 C.F.R. § 404.1905.

[13] 42 U.S.C. § 433(a).

[14] 42 U.S.C. § 433(b)(1).

[15] 20 C.F.R. § 404.1903.

[16] 20 C.F.R. § 404.1913(b).

[17] 20 C.F.R. § 404.1913(b)(1).

[18] 20 C.F.R. § 404.1913(b)(2).

[19] 20 C.F.R. § 404.1913(b)(3).

[20] 20 C.F.R. § 404.1913(b)(4).

[21] 20 C.F.R. § 404.1913(b)(5).

[22] 20 C.F.R. § 404.1902.

[23] 20 C.F.R. § 404.1902.

[24] 20 C.F.R. § 404.1902.

[25] 20 C.F.R. § 404.1902.

[26] 20 C.F.R. § 404.1913(b)(6).

[27] See, e.g., SSA POMS RS 02001.115(B) (Germany), SSA POMS RS 02001.165(B) (Switzerland), SSA POMS RS 02001.205 (Norway), SSA POMS RS 02001.270(A) (Belgium), SSA POMS RS 02001.315(A) (Canada); SSA POMS RS 02001.370(A) (United Kingdom); SSA POMS RS 02001.420(A) (Sweden); SSA POMS RS 02001.470(A) (Spain); SSA POMS RS 02001.525(B) (France); SSA POMS RS 02001.565(B) (Portugal); SSA POMS RS 02001.614(B) (Netherlands); SSA POMS RS 02001.662(B) (Austria).

[28] See, e.g., SSA POMS RS 02001.207 (Norway), SSA POMS RS 02001.280 (Belgium), SSA POMS RS 02001.315(B) (Canada).

[29] SSA POMS RS 02001.065(B)(1).

[30] SSA POMS RS 02001.065(B)(2).

[31] See, e.g., SSA POMS RS 02001.170(B) (Switzerland); SSA POMS RS 02001.201(A) (Norway); SSA POMS RS 02001.270(C) (Belgium); SSA POMS RS 02001.315(D) (Canada); SSA POMS RS 02001.370(C) (United Kingdom); SSA POMS RS 02001.420(B) (Sweden); SSA POMS RS 02001.470(C) (Spain); SSA POMS RS 02001.528 (France); SSA POMS RS 02001.567 (Portugal); SSA POMS RS 02001.620 (Netherlands); SSA POMS RS 02001.668 (Austria); SSA POMS RS 02001.725 (Finland).

[32] See, e.g., SSA POMS RS 02001.170(B) (Switzerland); SSA POMS RS 02001.201(A) (Norway); SSA POMS RS 02001.270(C) (Belgium); SSA POMS RS 02001.315(D) (Canada); SSA POMS RS 02001.370(C) (United Kingdom); SSA POMS RS 02001.420(B) (Sweden); SSA POMS RS 02001.470(C) (Spain); SSA POMS RS 02001.528 (France); SSA POMS RS 02001.567 (Portugal); SSA POMS RS 02001.620 (Netherlands); SSA POMS RS 02001.668 (Austria); SSA POMS RS 02001.725 (Finland).

[33] See, e.g., SSA POMS RS 02001.120 (Germany); SSA POMS RS 02001.270(D) (Belgium); SSA POMS RS 02001.315(E) (Canada); SSA POMS RS 02001.370(D) (United Kingdom); SSA POMS RS 02001.420(C), (D) (Sweden); SSA POMS RS 02001.470(D), (E) (Spain); SSA POMS RS 02001.526 (France).

[34] SSA POMS RS 02001.270(D), (E) (Belgium).

[35] SSA POMS RS 02001.315(E) (Canada).

[36] See, e.g., SSA POMS RS 02001.075 (Italy); SSA POMS RS 02001.130 (Germany); SSA POMS RS 02001.180 (Switzerland); SSA POMS RS 02001.209 (Norway); SSA POMS RS 02001.275 (Belgium); SSA POMS RS 02001.320 (Canada); SSA POMS RS 02001.375 (United Kingdom); SSA POMS RS 02001.430 (Sweden); SSA POMS RS 02001.480 (Spain); SSA POMS RS 02001.540 (France); SSA POMS RS 02001.575 (Portugal); SSA POMS RS 02001.630 (Netherlands).

[37] 20 C.F.R. § 404.1914.

[38] 20 C.F.R. § 404.1914.

[39] SSA POMS RS 02001.005(A).

[40] See, e.g., SSA POMS RS 02001.325(B) (Canada); SSA POMS RS 02001.385(B) (United Kingdom); SSA POMS RS 02001.695(C) (Austria); SSA POMS RS 02002.048(C) (Australia).

[41] SSA POMS RS 02001.005(C).

[42] SSA POMS RS 02001.005(B).

[43] Rev. Proc. 80-56.

[44] Rev. Proc. 80-56.

[45] Rev. Proc. 80-56.

[46] SSA POMS RS 02001.005(A).

[47] SSA POMS RS 02001.005(C).

[48] SSA POMS RS 02001.005(C).

[49] Rev. Proc. 84-54.

[50] SSA POMS RS 02001.005(D)(1).

[51] Rev. Proc. 80-56.

[52] Rev. Proc. 80-56.

[53] Rev. Proc. 80-56.

[54] SSA POMS RS 02001.005(C).

[55] Rev. Proc. 80-56.

[56] Rev. Proc. 80-56.

[57] Rev. Proc. 84-54.

[58] SSA POMS GN 01702.510(A).

[59] SSA POMS GN 01702.510(A).

[60] SSA POMS GN 01702.510(B).

[61] 20 C.F.R. § 404.1930.

[62] Soc. Sec. Rul. 82-42, 1982 CE 80.

[63] Soc. Sec. Rul. 82-42, 1982 CE 80.

[64] Soc. Sec. Rul. 82-42, 1982 CE 80.

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