Practical Tax Considerations Relevant to U.S. Totalization Agreements

Totalization agreements are one of the best kept secrets in the international tax arena. Very few practitioners know they exist, and fewer still know what those agreements do...

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Totalization Agreements: What They Are

A totalization agreement is a bilateral treaty between two countries that integrates the social security laws of the host and home countries. The purpose of the totalization agreements is two-fold. First, to eliminate double social security taxation on citizen/residents of the home country who are posted to the host country and second, to allow workers who divide their careers between the United States and a foreign country to continue to be covered under their home country's social security system.

The United States currently has 24 totalization agreements with foreign countries (Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, South Korea, Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, United Kingdom; the totalization agreement with Mexico has been signed, but is not yet in effect). The agreement with Canada was signed on March 11, 1981, and entered into force on August 1, 1984 (Agreement with Respect to Social Security of 1981, as amended by supplementary agreements).

You will note that a significant number of countries are missing from that list, not the least of which is China, as well as all South American countries and countries in the Indian Subcontinent.

The Canada - U.S. Totalization Agreement

... [T]his [commentary] discusses

(1) relevant U.S. tax considerations for Canadian employers, (2) the role that the Totalization Agreement ("the Agreement") between Canada and the United States plays in such considerations, (3) a few strategies to effectively manage resulting U.S. tax exposure, and (4) relevant procedures to follow for foreign employers and their employees to claim available exemptions from U.S. social security tax withholding... Although the EIA uses Canada as an example, the discussion is equally relevant to employers in the other 23 foreign jurisdictions.

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Conclusion and Recommendations

Foreign employers, when the issue is their non-resident alien employees' personal U.S. social security tax and employment income liabilities, should determine if an exemption from FICA tax withholding applies, including the exemption under the applicable U.S. totalization agreement, and also whether the employment income in general may be subject to any available exemption under the applicable-U.S. income tax treaty... [T]he Canadian employee should never be subject to double social security taxes on his wages; double income tax on those wages, however is a different story. When those wages are subject to U.S. and Canadian income tax, the non-resident alien employee should be able to claim a foreign tax credit on his Canadian return with respect to his U.S. income taxes.

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This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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LEXIS users can access the complete commentary HERE. Additional fees may apply. (Approx. 6 pages)

RELATED LINKS:  For more discussion of social security totalization agreements, see:

• Lexis Tax Advisor -- Federal Topical § 4C:3.11 - Treaty Coverage and Definitions: Taxes Covered

• 3-74 Rhoades & Langer, U.S. Int'l Tax'n & Tax Treaties § 74.00 - Introduction to Current U.S. Totalization Agreements

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