Why should employees being sent on assignment overseas obtain Certificates of Coverage prior to starting work in the host country? What purpose do they serve? How long are they valid for? Are they required for all kinds of assignments (e.g., commuter assignments, short-term, long-term, frequent business traveler)?
In this video, featuring Bob Rothery and Stacy Finch with KPMG LLP's Global Mobility Services practice, we delve further into the nuts and bolts of social security totalization agreements and learn about certificates of coverage, the “detached worker rule,” the application of home versus host country social security rules, in general, to different kinds of assignments, and respective employee and employer obligations and responsibilities.
Bob Rothery: Hi. I'm Bob Rothery with KPMG's Washington National Tax Practice, and I work in the Global Mobility Services Area.
Stacy Finch: Hi. I'm Stacy Finch. I also work in the Global Mobility Services Area alongside Bob on international Social Security issues.
Bob Rothery: Stacy, you'll remember that recently I did a video with John Seery where we talked about the basics of international Social Security taxation, and I thought today we'd get into more about totalization agreements and certificates of coverage.
Stacy Finch: Social Security is covered under the Federal Insurance Contribution Act and consists of two separate taxes. First, the old-age survivor's disability insurance, and second, hospital insurance, otherwise known as Medicare tax.
Individuals who are working for a U.S. employer who are sent overseas to work on an international assignment are subject to FICA. U.S. individuals who work overseas for a foreign employer are not subject to U.S. FICA and are subject to international Social Security.
Bob Rothery: That's a really important thing for people to keep in mind, because that rule can mean that people are subject to double taxation for Social Security purposes. If a person is working for a U.S. employer abroad, they could be subject to the foreign Social Security tax because they're working in the foreign country, and also to U.S. Social Security tax, FICA, because they're a U.S. person working for a U.S. employer. The general rule can mean that a person is subject to the two taxes at once.
If a person is working in a country that the U.S. has a Social Security totalization agreement with—which is kind of a mini-Social Security treaty—then we don't have that possibility of double tax. If a person is working in a totalization country, they're only going to pay one tax or the other, and the general rule is a territorial rule, they'll pay just the tax in the country that they're working in.
Stacy Finch: While there is the territoriality rule, the U.S. agreements, except for the one with Italy, also have a detached worker provision. This provision helps minimize the administration of international assignments related to Social Security and allows individuals to remain in their home country (U.S. Social Security) while they're on international assignment if the assignment period is less than five years.
Bob Rothery: So when a person is a detached worker like that, it's important that their employer get a certificate of coverage. That's a special permit, basically, that they get from the Social Security Administration where the U.S. Social Security Administration verifies that the person is a detached worker and is going to continue to be covered by FICA. And that's what demonstrates to the foreign authorities that the person will be exempt from the foreign Social Security tax while the person is working in that foreign country.
It's best to apply for that certificate of coverage before the person goes on assignment, but the Social Security Administration is very forgiving about granting them retroactively. So as soon as a company becomes aware that they should have gotten a certificate of coverage, they should go ahead and apply for it.
Stacy Finch: And, another important issue or area that employers should be looking out for is tracking the start periods and end periods for certificates of coverage—and there are systems available out there. Some are internal tracking, and some are external tracking. But this helps employers deal with compliance issues and helps distress any noncompliance and reputational risk that may be out there if a certificate of coverage or extension is not available or—if a certificate of coverage extension has expired.
Bob Rothery: That's absolutely right. And it's important to remember that after five years, when the certificate of coverage expires, then the person is no longer subject to FICA, and instead starts paying the foreign tax instead. Now, it's possible to get extensions. In fact, employers often will apply for extensions. But there are some limitations on those, right?
Stacy Finch: There are limitations on those extensions. Generally, the U.S. has some ability to automatically approve extensions. However, in most cases, the U.S. must work with the foreign Social Security jurisdiction to coordinate an extension between the two countries.
And one additional point that is important is when you have extended the five years and you're approaching this expiration period, the Social Security Administration does take some time, generally four to six weeks, to go out to the foreign jurisdiction and apply for the additional extensions.
Bob Rothery: Right. And I'll just note that the U.S. is open to extensions of as much as four years, so a total of nine years. But some countries are more strict, so the total amount of time that a person can have depends on what the other country is willing to grant.
Now, that addresses the length of certificates of coverage. It's also important to notice that there's really not any de minimus, at least in theory. No matter how short the assignment, the person should have a certificate of coverage, even if they're going to be working in the foreign country for just a short period of time.
And that raises the question, what if they go on frequent trips? What if the person's job is to go back and forth from one country to the other?
Stacy Finch: Now, Bob, that's a great question. And really, what you're looking at in the perspective of an individual going overseas on an extended work assignment arrangement through their employer for a longer-term duration beyond the five years, generally it's likely that that individual would not be eligible to receive a certificate of coverage.
Bob Rothery: Right. So that means, of course, that the person would be just subject to the general territorial rule, that they would pay the tax of the country that they're working in. What happens when they're going back and forth between the two countries?
Stacy Finch: Well, it's really confusing to people, Bob. There's actually no double tax if an individual is going back and forth in between totalized countries. So if the individual is working in two countries, the performance of services on a sourcing basis would apply. So an individual would pay Social Security tax where they're performing services.
Bob Rothery: Right, so if they're working between the two countries, we have to look at the portion of the compensation that applies to the U.S. and the portion of the compensation that applies to the other country, and they may be paying a Social Security tax in each country on that portion of the compensation.
Stacy Finch: Correct.
Bob Rothery: Now, another interesting thing that comes up is deferred compensation or assignment-related allowances, because often those are paid after the end of the assignment, and the question comes up as to whether those would be covered by the certificate of coverage if they're paid after the expiration of the certificate.
And the answer is yes, if they relate back to the period that was covered. So if a person gets a post-assignment allowance, and that allowance is related to their assignment that was covered by the certificate of coverage, that post-assignment allowance will also be treated as if it's covered by the certificate of coverage.
Stacy Finch: There are also special rules around self-employed individuals. These include board members or partners of professional service firms, and while some agreements allow tax on presence, most of the agreements tax on where an individual has residence. So it's important, even if you're a self-employed individual, to obtain a certificate of coverage while on international assignment.
Bob Rothery: Absolutely. You know, it's funny. I often observe that people think that FICA is really simple, it's just a simple withholding tax, and there's no nuances at all. But I think as we've just discovered, in an international context, Social Security is a really complicated topic. And whether or not the U.S. has a Social Security totalization agreement is a key fact in determining how Social Security is going to be applied.
Stacy Finch: Yes, it is.
Bob Rothery: Well, thanks, Stacy for joining me today.
Stacy Finch: Thank you, Bob. It was great to talk to you today.
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