What are totalization agreements and how do they impact relocation?
Totalization agreements are a key piece of the global tax equation. Business Analyst Mike Phillips has more in this Relo Tip Tuesday.
Complete transcript: “Hi, my name is Mike Phillips and I’m a business analyst here at Plus. Today I’d like to talk to you about totalization agreements, which are also known as bilateral social security agreements.
Most countries have social security programs which are funded by taxes levied on wages subject to taxation in that country. Historically, when someone moved abroad they might find themselves in a situation where they owed social taxes in both the host and home location on the same wages. To eliminate this double taxation, many countries have entered into totalization agreements with each other. These agreements exempt individuals from paying social security taxes either in the home or host location. For moves that are planned for less than five years, typically these taxes are paid in the home location. If a move is planned to last longer than that, usually the taxes will be paid in the host location.
In addition to preventing double taxation, totalization agreements also help to protect your employees by filling gaps in benefit’s eligibility. If a person works abroad for a significant portion of their career they can find themselves in a situation where they only qualify for limited benefits or in some extreme cases may not qualify for any benefits at all. Totalization agreements prevent this by allowing individuals to qualify for benefits based on combined country work credits.
So how does this impact your relocation program? Most international moves include a tax assistance benefit. So totalization agreements can save you a significant amount of money in gross-up. They also serve to protect your employees down the road which may make their decision to move a little bit easier. It’s important to note that totalization agreements are not automatically effective. A certificate of coverage must be obtained for each employee that you wish to have covered.
In summary, as your company sends employees around the world, it’s important to consider the role of totalization agreements and the benefits that they provide to your company and its employees. Thanks for watching!”