Although social security obligations can be one of the most significant contributions that employers will pay if they decide to send an employee on an international assignment, social security may also be one of the most overlooked aspects of the compensation package. The major social security issues that concern both employer and the employee going abroad are the following:
-
Whether contributions to social security plans will be required in the home country, host country, or both.
- Whether the international assignment will result in the employee losing any benefit entitlements.
If the assignee is required to contribute toward social security in more than one country or must contribute a larger amount overall than if he or she had stayed in the home country, the employer will need to consider whether to cover these additional costs on behalf of the employee. Going beyond the contribution dilemma, the employer will also have to determine how to deal with the situation should the expatriate stand to lose any benefit entitlements as a result of the international assignment.
Although these considerations are challenging for the employer, it is important to realize that a number of multi-lateral agreements (EU regulation 883/2004, Iberoamerican Organization Social Security Agreement, etc.) or bilateral totalization agreements (social security treaties between two countries) currently exist to help address concerns related to contributions and benefit entitlements – thereby making the employer’s task easier. This article will look at the extent and impact of such agreements in a selection of countries, as well as the potential social security costs associated with sending an employee on a temporary international assignment.
What Contributions Are Required?
A number of factors determine the type of social security contributions that must be made by the employer and employee, as well as the respective monetary consequences. (Chart 1 below illustrates some examples of differing rates for sample income levels.)
The rates and ceiling (or cap amounts) for social security differ by country. The chart provides the contribution amounts for both employees and employers, the amounts as a percentage of the gross salary and the marginal rate for social security for a range of gross salaries. (Note: the marginal rate is the rate applicable on the next dollar earned on top of the gross income stated.)
The amounts given are the obligatory contributions for Married individuals with two children. Besides the obligatory contributions, there may be extra contributions based on the company, industry, and/or level of risk. The sample rates are not company- or industry-specific. With regards to contributions that are related to the level of risk, we have applied the rates that are applicable to white-collar workers.
Chart 1: Home-Country Social Security Contribution Rates for Selected Countries for 2014
Gross income USD 30,000
| |
Employee |
|
Employer |
|
|
| Country |
SS EE |
SS EE % Gross |
Marginal SS EE |
SS ER |
SS ER % Gross |
Marginal SS ER |
| Brazil |
2,469 |
3.29% |
0.00% |
10,740 |
14.32% |
35.80% |
| Canada |
1,896 |
2.53% |
6.83% |
2,121 |
2.83% |
7.58% |
| China |
5,906 |
7.87% |
10.30% |
11,666 |
15.55% |
10.30% |
| France |
6,573 |
8.76% |
22.05% |
13,368 |
17.82% |
44.56% |
| Germany |
6,053 |
8.07% |
20.18% |
5,783 |
7.71% |
19.28% |
| Israel |
2,147 |
2.86% |
12.00% |
1,461 |
1.95% |
6.75% |
| Japan |
4,472 |
5.96% |
14.91% |
4,696 |
6.26% |
15.66% |
| Mexico |
811 |
1.08% |
2.38% |
5,784 |
7.71% |
17.15% |
| Singapore |
6,000 |
8.00% |
20.00% |
4,875 |
6.50% |
16.25% |
| South Africa |
161 |
0.21% |
0.00% |
761 |
1.01% |
1.00% |
| United Kingdom |
2,093 |
2.79% |
12.00% |
2,407 |
3.21% |
13.80% |
| United States |
2,295 |
3.06% |
7.65% |
2,715 |
3.62% |
7.65% |
Gross income USD 75,000
| |
Employee |
|
Employer |
|
|
| Country |
SS EE |
SS EE % Gross |
Marginal SS EE |
SS ER |
SS ER % Gross |
Marginal SS ER |
| Brazil |
2,469 |
3.29% |
0.00% |
26,850 |
35.80% |
35.80% |
| Canada |
2,951 |
3.93% |
0.00% |
3,274 |
4.37% |
0.00% |
| China |
6,329 |
8.44% |
0.00% |
12,088 |
16.12% |
0.00% |
| France |
15,985 |
21.31% |
20.20% |
32,244 |
42.99% |
44.57% |
| Germany |
13,806 |
18.41% |
10.95% |
13,261 |
17.68% |
10.95% |
| Israel |
7,547 |
10.06% |
12.00% |
4,498 |
6.00% |
6.75% |
| Japan |
10,256 |
13.67% |
6.35% |
10,802 |
14.40% |
6.95% |
| Mexico |
1,253 |
1.67% |
0.00% |
9,205 |
12.27% |
2.00% |
| Singapore |
9,266 |
12.35% |
0.00% |
7,517 |
10.02% |
0.00% |
| South Africa |
161 |
0.21% |
0.00% |
1,211 |
1.61% |
1.00% |
| United Kingdom |
6,601 |
8.80% |
2.00% |
8,617 |
11.49% |
13.80% |
| United States |
5,738 |
7.65% |
7.65% |
6,158 |
8.21% |
7.65% |
Gross income USD 150,000
| |
Employee |
|
Employer |
|
|
| Country |
SS EE |
SS EE % Gross |
Marginal SS EE |
SS ER |
SS ER % Gross |
Marginal SS ER |
| Brazil |
2,469 |
1.65% |
0.00% |
53,700 |
35.80% |
35.80% |
| Canada |
2,951 |
1.97% |
0.00% |
3,274 |
2.18% |
0.00% |
| China |
6,329 |
4.22% |
0.00% |
12,088 |
8.06% |
0.00% |
| France |
31,033 |
20.69% |
20.20% |
67,669 |
45.11% |
44.57% |
| Germany |
15,349 |
10.23% |
0.00% |
14,803 |
9.87% |
0.00% |
| Israel |
14,816 |
9.88% |
0.00% |
8,587 |
5.72% |
0.00% |
| Japan |
13,573 |
9.05% |
0.50% |
14,569 |
9.71% |
1.10% |
| Mexico |
1,253 |
0.84% |
0.00% |
10,705 |
7.14% |
2.00% |
| Singapore |
9,266 |
6.18% |
0.00% |
7,517 |
5.01% |
0.00% |
| South Africa |
161 |
0.11% |
0.00% |
1,961 |
1.31% |
1.00% |
| United Kingdom |
8,101 |
5.40% |
2.00% |
18,967 |
12.64% |
13.80% |
| United States |
9,429 |
6.29% |
1.45% |
9,849 |
6.57% |
1.45% |
Gross income USD 300,000
| |
Employee |
|
Employer |
|
|
| Country |
SS EE |
SS EE % Gross |
Marginal SS EE |
SS ER |
SS ER % Gross |
Marginal SS ER |
| Brazil |
2,469 |
0.82% |
0.00% |
107,400 |
35.80% |
35.80% |
| Canada |
2,951 |
0.98% |
0.00% |
3,274 |
1.09% |
0.00% |
| China |
6,329 |
2.11% |
0.00% |
12,088 |
4.03% |
0.00% |
| France |
57,544 |
19.18% |
16.88% |
128,771 |
42.92% |
40.27% |
| Germany |
15,349 |
5.12% |
0.00% |
14,803 |
4.93% |
0.00% |
| Israel |
14,816 |
4.94% |
0.00% |
8,587 |
2.86% |
0.00% |
| Japan |
14,323 |
4.77% |
0.50% |
16,219 |
5.41% |
1.10% |
| Mexico |
1,253 |
0.42% |
0.00% |
13,705 |
4.57% |
2.00% |
| Singapore |
9,266 |
3.09% |
0.00% |
7,517 |
2.51% |
0.00% |
| South Africa |
161 |
0.05% |
0.00% |
3,461 |
1.15% |
1.00% |
| United Kingdom |
11,101 |
3.70% |
2.00% |
39,667 |
13.22% |
13.80% |
| United States |
12,054 |
4.02% |
2.35% |
12,024 |
4.01% |
1.45%
|
In situations where no totalization agreement exists between the two countries, there may be extra costs for the employer. These additional costs are:
-
Mandatory employer-paid contributions to the host-country social security program.
- Reimbursement to the employee compensating for any extra expenditure incurred on social contributions as a result of the international assignment.
The latter point refers to multinational organizations that equalize – that is, minimize any financial gain or loss by the expatriate due to the unique consequences of an international assignment – on social security, thereby having an additional financial burden if they meet the employee’s host-country social security obligation as part of their expatriate policy. In addition, host-country tax law may deem such a payment by the employer as taxable compensation to the assignee – further increasing the overall monetary burden on the company.
How Totalization Agreements Work
Although social security agreements vary in coverage, depending on the agreed-upon terms and conditions set down by the two contracting signatories, their intent is similar. The primary purpose of such an agreement is to eliminate dual social security contributions, which occur when an employee from one country works in another country and is required to pay social security contributions to both countries on the same earnings.
Each totalization agreement includes an exception for international employees. Under this exception, a person who is temporarily transferred to work for the same employer in another county remains covered only by the country form which he or she has been sent. Both employee and employer continue to pay contributions to the home social security system.
Employees who are exempt from host social security contributions under a totalization agreement must document their exemption by obtaining a certificate of coverage form the country that will continue to cover them.
Example: A US employee sent on temporary assignment to the United Kingdom would need a certificate of coverage issued by the US Social Security Administration to prove his or her exemption from UK Social Security contributions. Conversely, a UK-based employee working temporarily in the United States would need a certificate of coverage from the UK authorities as evidence of exemption from US Social Security contributions.
The term “totalization” defines the second purpose of the agreement. The ultimate goal is to have an employee’s social security benefits – whether paid in a home or foreign country – totalized (or, summed), so that the employee can collect these monies, when eligible, from only one government. If individuals are required to contribute to social security programs outside their home countries, they will be eligible to collect these benefits if they meet certain specifications set forth by the host government.
Example: US agreements allow the US Social Security Administration to totalize US and foreign coverage credits only if the employee has earned at least six quarters of US coverage. (“Quarter” refers to work credits, whereby, for 2014, one credit is earned for each USD 1,200 of earnings, up to the maximum of four credits per year.) Similarly, a person may need a minimum amount of coverage under the foreign country’s system in order to have US coverage counted toward meeting the foreign benefit eligibility requirements.
The main requirement for collecting social security benefits upon retirement is contribution to a plan. In some cases, to collect retirement benefits, it is necessary for the employee to have contributed to the social security program and to have worked in that country for a specified amount of time.
Example: In the United States, in order to be eligible to collect retirement benefits from the Social Security Administration, an individual born in 1929 or later must earn 40 credits, with at least 6 of those earned in the United States. Those born prior to 1929 require fewer credits.
If an employee is ineligible to claim benefits in either the home or host country because of a failure to meet the time specifications, an existing totalization agreement between the two countries may provide a solution. The agreement permits the employee to totalize the time spent between the two locations and collect the social security benefits from one of the countries, assuming a minimum amount is met in either country or both. As an example, in the United States, if the combined credits in the two countries enable the employee to meet the eligibility requirements, a partial benefit can be paid, based on the proportion of the individual’s total career completed in the paying country.
The dual purposes of totalization agreements are met in different ways in different agreements and make it essential to understand the concept and specifications of each individual home-host covenant. Many totalization agreements follow the same general pattern of contribution and time requirements. Below is a description of the types of agreements entered into by selected countries.
United States Agreements
According to the US Social Security Administration, “The aim of all US totalization agreements is to eliminate dual Social Security coverage and taxation while maintaining the coverage of as many workers as possible under the system of the country where they are likely to have the greatest attachment, both while working and after retirement. Each agreement seeks to achieve this goal through a set of objective rules.”
These objective rules include the following, which may not be applicable to every agreement entered into by the United States:
-
Territoriality – International assignees are covered by the laws of the country in which they are working, rather than by both countries.
- Detached Workers – This rule exempts the territoriality rule where an international assignment’s duration is less than five years; the employee and the employer only pay contributions to the US Social Security system. A certificate of coverage should be requested from the US Social Security Administration.
- Self-employment – Self-employed workers are generally covered by the country of their residence.
At present, the United States has totalization agreements with the following countries:
Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Lithuania, Luxembourg, Netherlands, Norway, Poland, Portugal, Quebec, Slovak Republic, South Korea, Spain, Sweden, Switzerland, and United Kingdom.
On 29 June, 2004, the US-Mexico Social Security Agreement was signed. The agreement must be submitted to the US Congress and Mexico Senate for review, thus the agreement is not currently in force (as of December 2014).
United Kingdom Agreements
Under UK regulations, individuals and their contribution requirements fall into the following three categories:
-
Employees of the European Economic Area (EEA) – that is, all European Union (EU) countries, plus Iceland, Liechtenstein, Norway – and also Switzerland – are normally only responsible for contributing to the country in which they work, unless they follow the exception to this rule. The exception allows the employee to contribute to the home-country system for the first 24 months of the international assignment. For assignments longer than 24 months, subject to further conditions, the period can be extended to a total of five years. A form, A1, should be obtained with the home country social security authority, providing exemption from payment of National Insurance in the UK.
- Employees of non-EEA countries are responsible for contributions according to the specific treaty between their country and the United Kingdom. Although these agreements vary by country, they generally permit the individuals to contribute to their home-country social security program, not to the host-country program, for an international assignment that ranges from one to five years, depending on the country.
- Employees of countries in which no totalization agreement exists are responsible for contributions to both their home-country and UK plans. However, if certain requirements are met, depending on individual circumstances, the employee may waive the first 52 weeks of required contributions.
At present, the United Kingdom has totalization agreements with the following countries:
Barbados, Bermuda, Bosnia-Herzegovina, Canada, Gibraltar, Guernsey, Iceland, Isle of Man, Israel, Jamaica, Japan, Jersey, Macedonia, Mauritius, New Zealand, Norway, Philippines, Serbia and Montenegro, South Korea, Turkey, and the United States.
For all EU member states, the European rules are applicable, so if bilateral agreements are in place, they are not mentioned here.
European Union Member Countries
The European Community (EC) provisions on social security do not replace the different national social security systems by a single European system. To do so would be impossible due to the wide divergence in the standards of living and social security systems among the member states. What they do, however, according to the European Commission, is the following:
“Instead of harmonizing the national Social Security systems, the Community provisions on Social Security provide for a simple coordination of these systems… In other words, every Member State is free to decide who is to be insured under its legislation; which benefits are granted and under what conditions; how these benefits are calculated and how many contributions should be paid. The Community provisions establish common rules and principles which have to be observed by all national authorities, Social Security institutions, courts and tribunals when applying national laws. By doing so, they ensure that the application of the different national legislations does not adversely affect persons exercising their right to move and to stay within the European Union and the European Economic Area.”
The provisions offer solutions to a variety of problematic situations, such as the following:
-
In some member states, social security insurance is based on residence; in others, only persons engaged in a professional activity (and their families) are eligible for insurance.
Under country law, benefit entitlement is often conditional upon the completion of certain periods of insurance, employment, or residence. In addition, benefits are paid in many cases only to those residing within the member state; in other cases, the benefit amount is reduced if a person lives abroad.
Whenever several states are involved, the EC provisions on social security determine which country has to pay benefits and which national legislation applies. The basic principles are simple:
-
An individual is subject to the laws of only one member state at a time. This principle applies to all employed and self-employed persons covered by the EC provisions, regardless of the number of states in which the individual conducts professional activity. There is, however, one small exception: A person simultaneously employed in one member state and self-employed in another may, in exceptional cases, be insured in both states.
Employed and self-employed persons are insured in the country where they are engaged in professional activity. This coverage applies even if they live in another country or their companies or employers are situated in another member state.
If an individual is temporarily sent to another country to work for a period no longer than 24 months, the individual will remain insured under the “old” country even while posted in a “new” country. For assignments longer than 24 months, there is the possibility to opt for an Article 16 procedure. Article 16 agreements require the consent of the institutions of both member states involved and can only be used in the interest of a person or category of persons.
Where an employee is to be posted to another member state, a so-called attestation A1 (formerly E-101 certificate) should be applied for in the Member State where the social security will be prolonged. In the host state, the A1 will waive any social security contributions.
Since 1 January 2011, Regulation (EU) No 1231/2010 extends modernized coordination to nationals of non-EU countries (third-country nationals) legally resident in the EU and in a cross-border situation. Their family members and survivors are also covered if they are in the EU. It does not apply to Denmark or the United Kingdom.
The EU countries are:
Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom,.
The European Economic Area (EEA):
The EEA includes EU countries and also Iceland, Liechtenstein, and Norway. It allows them to be part of the EU’s single market.
Switzerland is neither an EU or EEA member but is part of the single market - this means Swiss nationals have the same rights to live and work in the EU/EEA.
Canadian Agreements
Canada has international social security agreements with more than 50 countries that offer comparable pension programs. These agreements are intended to:
-
Eliminate cases where workers might have to contribute to the social security system of the other country for the same work as well as to ensure that their coverage under the Canada Pension Plan will not be interrupted.
- Coordinate the pension programs of two countries where a person has lived or worked. If a person has lived or worked in another country, the person may be eligible for social security benefits, either from that country or from Canada.
For an employee, an employer, or a self-employed worker to contribute only to the Canada Pension Plan and be exempt from contributing to the pension plan of the other country, that employee, employer, or self-employed worker must have a certificate of coverage from the Canada Revenue Agency. A certificate of coverage is used to inform the other country that the worker is covered under the Canada Pension Plan.
The agreements cover a time span from two to five years, depending on the host country, and require at least one valid contribution in Canada for an individual to be able to collect benefits in Canada.
At present, Canada has totalization agreements with the following countries:
Antigua and Barbuda, Australia, Austria, Barbados, Belgium, Brazil, Bulgaria, Chile, Croatia, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Finland, France, Germany, Greece, Grenada, Guernsey, Hungary, Iceland, Ireland, Israel, Italy, Jamaica, Japan, Jersey, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Mexico, Morocco, Netherlands, New Zealand, Norway, Philippines, Poland, Portugal, Romania, Saint Lucia, Saint Vincent & the Grenadines, Serbia, Slovak Republic, Slovenia, South Korea, Spain, St. Kitts and Nevis, Sweden, Switzerland, Trinidad & Tobago, Turkey, United Kingdom, United States, and Uruguay.
The following lists reflect existing totalization agreements for other select nations.
Brazil
At present, Brazil has totalization agreements with the following entities:
Belgium, Canada, Cape Verde, Chile, France, Germany, Greece, Iberoamerican Organization Social Security Agreement, Italy, Japan, Luxembourg, Mercosur Social Security Agreement, Portugal, and Spain.
Note: Countries part of the Iberoamerican Organization are: Andorra, Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Portugal, Spain, Uruguay, and Venezuela.
***Mercosur countries are: Argentina, Brazil, Paraguay, and Uruguay.
** Spain and Portugal are covered by both a bilateral agreement and by the Iberoamerican Organization Social Security Treaty.
France
At present, France has totalization agreements with the following countries:
Algeria, Andorra, Argentina, Benin, Bosnia-Herzegovina, Cameroon, Canada, Cape Verde, Chad, Chile, Congo, Egypt, French Polynesia, Gabon, Guernsey, India, Iran, Iraq, Israel, Ivory Coast, Japan, Jersey, Jordan, Lebanon, Macedonia, Madagascar, Mali, Mauritania, Mayotte, Monaco, Montenegro, Morocco, New Caledonia, Niger, Philippines, Quebec, San Marino, Senegal, Serbia, South Korea, Switzerland, Togo, Tunisia, Turkey, USA, Uruguay, Venezuela, and Vietnam.
(Note: Students only are covered by the agreement with Vietnam).
For all EU member states, European rules are applicable, so bilateral agreements in place are not included here.
Germany
At present, Germany has totalization agreements with the following countries:
Australia, Bosnia-Herzegovina, Brazil, Canada, Chile, China, India, Israel, Japan, Macedonia, Morocco, Quebec, Serbia and Montenegro, South Korea, Switzerland, Tunisia, Turkey, and the United States.
For all EU member states European rules are applicable, so bilateral agreements in place are not included here.
Israel
At present, Israel has totalization agreements with the following countries:
Austria, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Romania, Slovak Republic, Sweden, Switzerland, and United Kingdom.
Why Some Countries Have No Totalization Agreements
There are many nations throughout the globe – for example, Singapore and South Africa – that do not participate in totalization agreements with other countries. The explanation for this point varies by country. The absence of an agreement is generally due to one of several possible reasons:
-
Lack of coherence between the home-country and host-country social security systems.
- Lack of international assignees sent to these countries (no need for such agreements).
- Some countries only require permanent residents or nationals to contribute social security funds.
- Lack of a social security system.
Further, many countries have complicated social security systems, such as those dependent on the type of job performed. In these cases, a totalization agreement would have to set forth very explicit policies and restrictions that may not apply in other countries.
Looking at Regional Costs
In order to understand the complex situation that might exist when an employee is sent on an international assignment – solely based on the cost of social security – consider Charts 2 and 3 below, showing employee and employer social security contributions, respectively, as a percentage of income in a series of home countries. The illustrations use USD 150,000 and its equivalent monetary value in the respective countries.
Chart 2: Employee Social Security Contributions as a Percentage of Income
Chart 3: Employer Social Security Contributions as a Percentage of Income
In general, the following trends are applicable:
-
With some exceptions, European countries have the highest contribution rates among the countries presented.
- Asian and North American countries lie somewhere in the middle, with a varying degree of percentage contributions.
- The lesser-developed countries in Africa and Latin America are in the lower percentiles due to the lack of sophisticated social security systems and policies in some countries.
Employers should consider this element as one of the factors when deciding whether to send an employee on an international assignment – or, whether there is an alternative solution, such as hiring a local-national employee in the host country.
On a Final Note
Social security contributions – depending on both the home and host countries – can become a very costly aspect of an expatriate assignment. Due to the existence of numerous totalization agreements that set out specific terms and conditions, confusion about social security contributions and benefit entitlements has gradually lessened – along with employer costs – but the issue still often requires the advice of professionals with expertise in the field.
Complicating the task of an expatriate administrator are the multiple combinations of countries that do not have any agreements. The lack of an agreement can potentially result in a significant financial burden on multinational employers, for example if a company is sending a US expatriate to Brazil. Additional downsides when no agreement exists include dual contributions and benefit ineligibility – all factors to be considered in developing an international assignment policy.