In the backdrop of the successful India-visit of the US president, prime minister Narendra Modi said, “India and the US will restart discussions on a social security agreement and resume talks on bilateral investment treaty.” Once the long-pending agreement between India and US comes into force, it will benefit millions of Indians working in the US, with regard to social security contributions.
A social security agreement (SSA) is an agreement between two countries, which provides three benefits to internationally-mobile employees, namely:
(a) continuation of social security contributions in the home country,
(b) portability of social security benefits on relocation, and
(c) totalisation of the period of contribution in the host country for determining the eligibility for benefits.
India has now signed SSAs with 18 countries. However, only 13 of these SSAs have been enforced so far. SSAs between India and the following countries are active: Belgium, Germany, Switzerland, Denmark, Luxembourg, France, South Korea, The Netherlands, Hungary, Sweden, Finland, Czech Republic and Norway.
After the US resident’s visit to India, the progress on the Indo-US SSA, slow thus far, should gain momentum.
Why is an Indo-US SSA relevant?
* If the SSA comes through, then Indian professionals working in the US will not be required to make social security contributions in the US, provided they continue to be part of, and contribute to, the India provident fund. They may do so by obtaining a certificate of coverage (CoC) and be exempt from social security contribution in the host country. A CoC issued by one country serves as proof of exemption from social security taxes on the same earnings in the other country.
* The Indian professionals will continue to be considered as “local employees” in India—as per India’s social security scheme, Indian employees who are exempt from host country social security contribution under the social security agreements are not classified as “international workers” and higher allocation towards pension will not be required.
* Employees who will contribute to social security in both India and US will be eligible to aggregate periods covered in both countries to determine eligibility to social security benefits in either country.
* An Indo-US SSA will also favourably impact the cost of employment
Let’s take an example to explain the benefits of an Indo-US SSA. Let’s assume that Anil works in the US while his payroll remains in India. He has been contributing to the PF in India and may want to continue the same during the period of his US assignment in order to be eligible for all the social security benefits in India. However, he would also be required by US law to contribute to social security in the US. On completion of his US assignment, he may not able to withdraw the US social security contributions unless he completes the required number of years of mandatory contribution, which is usually not met by assignees like Anil as they would generally be send on an assignment spanning 2-4 years. Hence, there is loss of the entire contribution, which increases the cost of assignment.
However, if an SSA comes into place between India and US, Anil can continue contributing to the Indian provident fund and will be exempt from the social security contribution in the US, provided he obtains a CoC from the Indian PF authorities (by continuing to contribute to the Indian PF) and on the basis that an Indo-US SSA recognises the same.
Also, in situations where the payroll gets shifted to the US, individuals shall be allowed to withdraw the overseas social security contributions with the help of the SSA after completion of their employment outside India, provided the social security laws in that country allows the same.
With a large population of Indians working in the US, India has been pressing for an SSA with the US, which would allow either the repatriation of social security contributions to India on the completion of foreign assignment or get an exemption from overseas social security contribution itself.
For the Indo-US SSA to be more effective, certain points must be looked upon.
Most of the signed SSAs exempt their nationals working in either country from social security contributions only for limited short duration. Generally, these SSAs exempt workers for an assignment period of five years, which may be extendable, subject to mutual consent of both authorities. Therefore, the Indian workforce on long-term assignments will continue to be taxed for dual contributions. Hence, it would be an effective measure if the period of exemption and the extension both are for longer periods in the Indo-US SSA. The benefit of totalisation clause should be available under the Indo-US SSA.
Regardless of India’s late entry in signing the SSAs, we still believe it will go a long way in encouraging and cementing the mobility of human resources between India and US.
By Amarpal Chadha
The author is Partner (tax & regulatory services), EY. Views are personal