International assignments come with many benefits as well as many expenses. When relocating assignees overseas, you want to be as tax advantageous as possible to help undercut some of those expenses. One way to do that is by minimizing social security tax costs where applicable.
Assignees living and working in a host country are typically subject to host social security taxes on wages earned during the assignment period. However, there may be treaties in place to help reduce these costs.
Totalization agreements are bi-lateral social security tax treaties between countries exempting the assignee from having to pay social security taxes in the host country during the assignment period in order to:
- avoid dual taxation
- allow continued participation in the home social security tax system
As a result, assignees remain eligible for monthly retirement, disability or survivors benefits under the social security system of their home country. The U.S. has 25+ totalization agreements with countries including Canada and most European countries. For a complete list, check out the U.S. Social Security Administration’s website. It's important to note that other non-U.S. countries also have reciprocal totalization agreements, so be sure to review for this during the assignment planning phase.
Certificates of Coverage
While totalization agreements are the actual tax treaty agreements made between countries, the Certificate of Coverage (CoC) is the document the employer receives after the application for exemption is processed and approved by the authorities for the employee. Although a CoC should be applied for by the home country employer prior to the assignee’s departure, it is possible to request a CoC on a retroactive basis.
For example, a U.S. outbound assignee must obtain a CoC from the U.S. Social Security Administration (SSA) to document exemption from paying social security tax in the non-U.S. country if a totalization agreement exists between the U.S. and that host country. The CoC can be applied for online here.
Upon receipt of the certificate, a copy should be presented to the foreign payroll and/or foreign authorities as proof of the exemption from paying foreign social security taxes for the period shown on the certificate. Likewise, if a U.S. inbound assignee receives an exemption from paying into the U.S. social security system, a copy of the certificate (also known as portable document A1, formerly E101) should be retained in the employer’s U.S. files as proof of the exemption from paying U.S. social security taxes in the case of a payroll audit.
A CoC needs to cover the length of the assignment period. In the event of assignment extensions and repatriations, certificates must be updated or canceled with documentation placed in your files to ensure global compliance. Most certificates expire after five years, at which time social taxes will be due in both the home and host country.
The U.S. has a detached worker rule with a five-year limit on exemptions for detached workers (assignees who are expected to be on assignment five years or less), which is typically longer than the limit provided in other countries. Additional foreign social security costs can be very costly to your company, so it’s important to track expiration dates for CoCs along with current assignment start/end dates (including extensions) for all your assignees to minimize any gaps in coverage.
If you’re looking for more assistance in managing global compliance of all social security obligations for your program, Lexicon would be happy to help. Just let us know, and we'll get started!