Totalization agreements.

• Author: Nazir, Sadia

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 at right. 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 country's 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...