Recent media reports suggest that Indian nationals working in the US contribute about $2-3 billion annually to the US social security system. A large part of this sum is neither utilised by, nor refunded to the Indian nationals as they generally spend less than 10 years (40 quarters) in the US which is the minimum time limit required to seek benefits under the US social security system. In comparison to the aforesaid contribution, the US nationals working in India, and their employers, contribute a relatively small portion to the Indian social security system popularly known as provident fund. Further, a large part of these contributions is refundable to the US nationals from their provident fund account on completing 58 years of age. Therefore, there is an anomaly which should be addressed by the two governments at the earliest. It is pertinent to note that the bilateral trade between India and US is currently pegged at approximately $100 billion. The aim of the two governments is to increase the bilateral trade to $500 billion over the next few years. India’s key exports to the US being services and human resources, it is likely that Indian nationals and their employers would continue to contribute to the US social security system in much larger proportions as the economic ties strengthen further.
On a broad basis, Indian nationals working in the US contribute 6.2% of their respective salaries towards Old-Age, Survivors, and Disability Insurance (OASDI) and another 1.45% towards Medicare. Similar contributions are made by their employers. This results in a total contribution of 15.3% of salary to the US social security system. On the other hand, US nationals working in India contribute 12% of their respective salaries towards provident fund and their employers contribute 8.33% towards pension and 3.67% towards provident fund. This results in a total contribution of 24% of the salary to the Indian provident fund.
The social security systems in different countries offer different benefits, which may not necessarily match with the benefits offered by the social security system of the home country of the international assignees. In order to protect the rights of the international assignees, and to avoid double contribution to two social security systems, the governments of different countries sign bilateral and multilateral agreements. The bilateral social security agreements, also known as totalisation agreements, have a history of almost a hundred years now. The first bilateral social security agreement was signed in 1919 between France and Italy. Since then, these agreements have become the norm for countries with the increase in the movement of people amongst them.
In the last decade, India has started signing bilateral social security agreements because a large number of Indian nationals have started working overseas. It has been India’s long standing demand to sign an agreement with the US, while the US view, in general, is that India’s social security system is not compatible with its system in terms of coverage, i.e., benefits offered and the percentage of population covered under the social security regime.
Still, the argument for signing social security agreement between the two countries carries a lot of weight, especially from India’s perspective, because a lot of money is being contributed by the Indian nationals and their employers, which only add to the overall cost of doing business for the Indian companies, without any corresponding benefit
Once an India–US social security agreement is concluded, the assignees and their employers will be exempt from making dual contributions in both the home and host country. Further, US nationals will be eligible for refund of both their provident fund and pension accumulations at the time of their repatriation. At present, US nationals are eligible to claim refund of their provident fund contribution only on attaining 58 years of age and can receive their pension benefit only if they have worked in India for at least 10 years. Another key benefit will include the period of service in India and the US which will be added together to determine eligibility for social security benefits under the social security system, in both, the US and India. This would inter alia reduce the cost of international assignments and correspondingly the cost of doing business for both the US and the Indian companies.
It is important to note that India has signed social security agreements with 18 countries. Similarly, the US has signed such agreements with many countries. Interestingly, there are many countries in common with which both the US and India have signed social security agreements on one-on-one basis, like Belgium, Germany, Switzerland, France, Luxembourg, Netherlands, Denmark, Czech Republic, Republic of Korea, Norway, Finland, Canada, Japan, Sweden, Austria, Portugal and Australia. Therefore, there is already a common ground or meeting of minds, albeit in the context of other countries, for the US and India, for signing a bilateral social security agreement.
This agreement is desirable not only on grounds of fairness and equity, but will also help cement the Indo-US political and economic ties. President Obama’s visit and subsequent government-to- government discussions are a good platform to close the loop on the Indo-US totalisation agreement.
By Vikas Vasal
With inputs from Rambir Dalal, Director, KPMG in India
The author is Partner (Tax), KPMG in India. Views are personal