JOHN SEERY: Hi, I'm John Seery of KPMG's Washington National Tax Practice. The new Social Security Totalization Agreement between the United States and Brazil entered into force recently, which is expected to help boost cross-border business and the movement of workers between the two countries.
We've asked our international Social Security expert Bob Rothery in San Diego to comment on the details of the agreement. Welcome, Bob. First of all, Bob, remind us, what is a totalization agreement?
BOB ROTHERY: Well, thanks, and I'm happy to be with you today, John. So, the totalization agreement is like a mini-treaty that prevents double Social Security tax, and it also coordinates the provision of certain Social Security benefits. So, the agreement with Brazil was signed back in June 2015, and it's the U.S.'s 27th.
There's also three more coming up. The agreement with Uruguay just entered into effect on November 1st, and there's a Slovenia agreement that'll enter into effect on February 1st of 2019. And also in the pipeline is an agreement with Iceland. Obviously, the one with Brazil is the one that will affect the most people.
JOHN SEERY: When workers leave their home country--say, the United States -- and begin working in a host country--say, Brazil--I believe they are required to pay Social Security taxes in both countries, right, Bob?
BOB ROTHERY: That's right.
JOHN SEERY: And this can pose problems for international assignments. How does the totalization agreement prevent this?
BOB ROTHERY: So, where a person might be subject to Social Security tax in both home and host countries, the agreement determines which country has the jurisdiction to tax. So generally, it's the country where the person is working. So, for example, a U.S. person working in Brazil will generally be exempt from FICA and only be subject to Brazilian Social Security tax.
JOHN SEERY: Now, you said "generally" twice in the same sentence, so I'm thinking there must be some exceptions.
BOB ROTHERY: That's right. When a person is sent by his home country employer to work temporarily in the other country, he's referred to as a detached worker, and that person is exempt from the host country tax and remains covered only by the home country tax for up to five years.
JOHN SEERY: And that's where the certificates of coverage become important?
BOB ROTHERY: Exactly. If a person is a detached worker, his employer needs to get that certificate of coverage from the home country authorities to validate the exemption from the host country tax.
JOHN SEERY: We reported recently in our GMS Flash Alert that the U.S. Social Security Administration made the online certificate of coverage application for Brazil available on October 1st, 2018, the date that the U.S.-Brazil Agreement entered into force. The URL for the application should be at the bottom of the screen.
Now, Bob, many employers are trying to understand how the agreement affects their U.S. workers who are already in Brazil and vice versa. What else can you tell us?
BOB ROTHERY: Well, right. There are some transition rules that people need to be aware of when a new agreement enters into force. But the first thing to understand is that the agreement is not retroactive. A person who's been paying Social Security tax in both countries is not entitled to a refund for tax pad for -- before the agreement entered into effect.
JOHN SEERY: But does that mean the person isn't eligible for a certificate of coverage?
BOB ROTHERY: No, they're still eligible, John. An American who's already working in Brazil is eligible for a certificate of coverage if he already otherwise qualifies as a detached worker.
JOHN SEERY: In other words, if his U.S. employer sends him to Brazil on an assignment that's not expected to be longer than five years?
BOB ROTHERY: That's right. And the transition rules say that a person who's already working in Brazil can get a certificate of coverage for up to the full five-year limit regardless of how long he's already been there, as long as the assignment really isn't expected to be permanent.
Of course, the rules also work in reverse. A Brazilian who's already working in the U.S. can get a certificate of coverage for up to five years from the Brazilian authorities.
JOHN SEERY: Now, what about beyond the five-year period? My understanding is that extensions can typically be obtained.
BOB ROTHERY: Well, that's true, John. Many totalization agreements allow for extensions beyond the five-year period. But the U.S.-Brazil agreement has a special provision that specifies that an extension is only allowable where the individual has been away from the host country for at least six months.
JOHN SEERY: Is there anything else that's particular to this agreement?
BOB ROTHERY: Yeah. Well, without going into details, yes, this agreement does have a special rule for individuals who have been temporarily working in a third country.
JOHN SEERY: Okay, we're running out of time, but I just want to come back to a point made at the beginning of our discussion. A key advantage of this totalization agreement between the U.S. and Brazil is being able to pay just one Social Security tax rather than two.
This should certainly appeal to workers and help companies keep their international assignment costs down, which should help spur the transfer of workers between the two countries.
BOB ROTHERY: That's right, but getting that certificate of coverage as soon as possible is key. Also, for those workers who are currently in the country under the old rules, once that worker's home and host country employers get authorization to subject the worker to only one Social Security system, the employers might have to make arrangements to change the Social Security withholding on that worker's compensation.
JOHN SEERY: Good to know. Well, thank you for helping us better understand the important features of this historic agreement between the two countries.
BOB ROTHERY: Thanks, John.