Social Insecurity: The Case for Totalization With India

Social Insecurity: The Case for Totalization With India

By Josh Craddock, JD ‘18

Death and taxes are inevitable, but at least death does not repeat itself. This maxim bites especially hard under current U.S.-India policy: expat workers pay into both countries’ Social Security systems, but are ineligible for benefits from their nation of employment. As India becomes a prominent player in the global market, international business between the United States and India has been setting new records each year. Last year, U.S.-India trade reached $107 billion, up from $60 billion in 2009.[2] Profitable business between these two countries has never been more promising. But without a change in policy, neither country can realize the full benefits of economic partnership.

In 2015, more than 275,000 Indian nationals were admitted to the United States on temporary worker visas.[3] Indians using H-1B and L-1 visas annually contribute approximately $3 billion to the American Social Security system—contributions from which they cannot receive retirement or disability benefits, and which they cannot repatriate to their home country—in addition to their payments into India’s Social Security system.[4] And this estimate does not include additional contributions made by these workers’ spouses who may be employed, such as those using L-2 visas. Over the past decade, Indian nationals working in the United States have contributed over $27.6 billion to the U.S. Social Security system.[5]

The current dual-taxation system also imposes substantial hardships on Americans working in India. Although no reliable statistics exist on how many Americans are employed in India, the Indian government estimates their contributions to India’s Employees’ Provident Fund Organization (EPFO) was $150 million in 2011.[6] These American expats are likewise unable to repatriate or benefit from their contributions to the Indian system, which amount to 12% of their total annual salary.[7] These contributions must be matched by an equal amount from the American citizen’s employer. Furthermore, when these Americans and their families return home, they may not qualify for retirement, disability, survivorship, or dependency benefits in the United States due to residence requirements for eligibility.[8]

This problem of taxation without benefit eligibility is compounded when one considers that employers are required to match their employees’ Social Security contributions in both countries—a total tax rate of 19.65% of an employee’s salary.[9] Employers that guarantee that an overseas assignment will not decrease their employee’s after-tax income are particularly affected. These employers pay both the employer and the employee Social Security contributions, but this payment is treated as “taxable compensation to the employee, thus increasing the employee’s income tax liability.”[10] The employer will often pay the additional income tax, which creates what the Social Security Administration calls a “pyramid effect” that, depending on the tax rate, can increase the employer’s foreign social security costs to as much as 65-70% of an employee’s salary.[11]

With such high tax rates, even corporations that do not pay the employee contribution may find beginning and maintaining overseas operations prohibitively expensive. Indian corporations may similarly be unable to pay American workers to work in India.

Because of these costs, the existence of a totalization agreement between the United States and another country is a significant factor American companies consider when choosing where to locate a foreign branch.[12] This sort of dual taxation hurts economic growth and may actually reduce tax revenue.[13] In the short term, both countries obtain Social Security revenue from expats who cannot collect on their contributions. But this practice usually deters investment and impedes labor mobility, leading to lower economic activity and tax revenues in the long run.[14]

Developed countries like the United States typically benefit more from totalization agreements than developing countries,[15] but Indian officials believe the agreement would help their nation, as well. They report that the lack of a totalization agreement “increases the cost of hiring Indian nationals,” discourages Indian workers from seeking employment in the United States, and “operates as a market barrier for Indian companies considering entry into the U.S. market.”[16] How many American businesses and entrepreneurs have been discouraged from investing in India, or vice-versa, because of the lack of an agreement to coordinate or “totalize” the two systems?

Currently, the United States has totalization agreements with twenty-five countries, including South Korea, Belgium, Czech Republic, and Japan.[17] India has totalization agreements with nineteen, all but one of which overlap with those with which the United States has signed agreements.[18] The Indian government is keen on signing such an agreement with the United States, yet negotiators have been stuck in a bureaucratic quagmire that has lasted for more than a decade.[19]

The current barrier to enacting such an agreement is the American objection that the two nations’ Social Security systems are incompatible because India’s EPFO does not cover 50% of the nation’s working population—most of which is employed informally.[20] But the United States’ objection is dubious, because both countries have identified practical ways to resolve the differences between their systems. In 2008, a team from the U.S. government met with officials at India’s EPFO to draw parallels between the two systems and to ensure a smooth repatriation system.[21] The joint team’s ensuing report outlined a plan to integrate the two systems if a totalization agreement were eventually passed.[22] In this sense, whether the Indian Social Security system is mandatory for Indian citizens working in India is irrelevant in practice. The pertinent fact is that EPFO contributions are mandatory for American citizens working in India.[23]

In truth, the hold-up likely stems from the United States’ unwillingness to allow repatriation of benefits before workers establish ten years of legal permanent residency.[24] Such a policy excludes the vast majority of Indian workers in the United States who are authorized on visas lasting only five to seven years. The U.S. and Indian governments are not only doubly taxing overseas workers’ social security contributions; they are also taxing workers’ patience with endless negotiations.

American reticence to reduce the residency requirement may be partly due to worries about Social Security’s towering deficit of unfunded liabilities. That deficit—conservatively estimated at $23.1 trillion[26]—would exist with or without the comparatively paltry contributions from Indian workers.[27] Deeper problems with the Social Security deficit will not be solved by taxing Indian workers without providing them benefits or permitting repatriation. The system will not be pushed over the edge into collapse because of a totalization agreement.

Professor Mukul Asher, a public policy expert from the National University of Singapore, suggests a middle ground that would serve both parties.[28] He argues that a totalization agreement created along similar lines as India’s agreement with Belgium would be an effective model for the United States.[29] This type of system would exempt workers from contributing to the Social Security system in the country where they are employed for their first five years, and allow them to repatriate any benefits that accrue after that time. India has recently signed similar totalization agreements with Canada and Australia.[30]

Overcoming American hesitation about an Indian totalization agreement is a key step to creating economic growth. Congress should authorize a congressional-executive agreement to end the negotiation and immediately conclude a totalization agreement with India. Rep. Engel’s proposal for requiring the Secretary of State to provide Congress with updates on totalization negotiations is a good first step.[31] Encouraging American businesses to expand to India could bring profits back home, while encouraging Indian businesses to open branches in the United States could create jobs in America. By increasing the profitability and competitive position of companies that adapt to the globalizing workforce, we can cultivate the full potential of the U.S.-Indian business partnership.

[1] See Bureau of Econ. Analysis, U.S. Dep’t of Commerce, U.S. Trade in Goods and Services by Selected Countries and Areas, 1999-present (June 3, 2016), http://www.bea.gov/newsreleases/international/trade/trad_geo_time_series.xls [https://perma.cc/ZL9H-PDN4].

[2] Id.

[3] This number was calculated by adding all temporary worker visas in classes H, L, O, P, and Q granted to Indian nationals in fiscal year 2015. See Bureau of Consular Affairs, U.S. Dep’t of State, Nonimmigrant Visa Statistics: Nonimmigrant Visa Issuances by Visa Class and by Nationality (2015), https://travel.state.gov/content/dam/visas/Statistics/Non-Immigrant-Statistics/NIVDetailTables/FY15%20NIV%20Detail%20Table.pdf [https://perma.cc/FWK4-YMXL].

[4] See Jacob Funk Kirkegaard, The Economic Scope and Future of US-India Labor Migration Issues 26 (Peterson Inst. for Int’l Econ. Working Paper Series, Working Paper No. 15-1, 2015), https://piie.com/publications/wp/wp15-1.pdf [https://perma.cc/B7LJ-48XC].

[5] This number was calculated by multiplying the earnings of Indian H-1B and L-1 visa-holders in the United States between 2002 and 2012 by the FICA rate for employee contributions. See id. at 26 (showing the employee FICA rate to be 7.65%), 44–45 (showing that such visa-holders earned $361.2 billion). See also Sujeet Rajan, Best ‘gift’ Narendra Modi can give to NRIs in the US: Totalization pact on social security taxes, Am. Bazaar (Apr. 22, 2016), http://www.americanbazaaronline.com/2016/04/22/best-gift-narendra-modi-can-give-to-nris-in-the-us-totalization-pact-on-social-security-taxes410451 [https://perma.cc/MJB8-WXYX] (putting the estimate at $25 billion).

[6] See ET Bureau, Indians in US may get to bring back social security contribution, Econ. Times (July 20, 2011), http://economictimes.indiatimes.com/nri/returning-to-india/indians-in-us-may-get-to-bring-back-social-security-contribution/articleshow/9291675.cms [https://perma.cc/FM4A-S997]. In 2006, it was estimated that there were 65,000 Americans working in India. See Condoleezza Rice, Our Opportunity With India, Wash. Post (Mar. 13, 2006), http://www.washingtonpost.com/wp-dyn/content/article/2006/03/12/AR2006031200978.html [https://perma.cc/2HB6-MGM6].

[7] See Liz Mathew, Govt mandates EPF for foreign workers, Wall St. J. (Oct. 8, 2008), http://www.livemint.com/Home-Page/TgcgJKyGSIOTSh0QCmwh5J/Govt-mandates-EPF-for-foreign-workers.html [https://perma.cc/7EP6-KDY9].

[8] See Kirkegaard, supra note 4, at 25–26; Social Security and The Overseas American, Am. Citizens Abroad (Jan. 31, 2008), http://web.archive.org/web/20101202055033/http://www.aca.ch/joomla/index.php?option=com_content&task=view&id=84&Itemid=45 [https://perma.cc/V59W-XMA4] (“Foreign spouses of U.S. citizens must have been married to the U.S. citizen spouse and lived with the U.S. citizen spouse in the United States for five years to be eligible to receive dependency and survivor benefits. . . . Children who are adopted outside the United States will not be paid any dependency or survivor benefits even if the prior U.S. residency requirement is met. this loss of benefits does not apply to . . . citizens or residents of countries with which the U.S. has a Social Security Agreement.”).

[9] See Mathew, supra note 7 (noting that American workers’ 12% contributions to India’s EPFO are matched by employers); Understanding Employment Taxes, Internal Revenue Serv. (June 21, 2016), https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes [https://perma.cc/47DN-ZSZE] (observing that in 2013, the employee Social Security tax rate was 6.2%, which is matched by an equal amount from the employer).

[10] Office of International Programs, Soc. Sec. Admin., U.S. International Social Security Agreements, https://www.ssa.gov/international/agreements_overview.html [https://perma.cc/6FNT-V5DQ].

[11] See id.

[12] See Michael Lang & Jeffrey Owens, The Role of Tax Treaties in Facilitating Development and Protecting the Tax Base 35 (WU Int’l Taxation Research Paper Series No. 2014-03, 2014) (“Surveys of business, however, do suggest that MNEs [multinational enterprises] look both at the existence of a [double tax elimination] treaty and its provisions when making a decision on where to locate and that other things being equal they will favour a country that has a good treaty network.”).

[13] See María Amparo Grau Ruiz, Mutual Assistance for the Recovery of Tax Claims 105 (2003) (“International double taxation causes distortions which are harmful to the economy and indirectly reduces tax revenue.”); C. Fred Bergsten, Transcript: Assessing the Future of U.S.-India Relations, Council on Foreign Relations (Nov. 17, 2015), http://www.cfr.org/india/assessing-future-us-india-relations/p37245 [https://perma.cc/6Q6G-NAJ8] (“In economic terms, it would make great sense for the U.S. to liberalize . . . on totalization.”).

[14] See Lang & Owens, supra note 12, at 14–17 (noting that cross-jurisdictional tax regimes “have a significant influence on decisions about the location of production and investment” and that taxation agreements “can support the promotion of cross-border activities” such as foreign direct investment and labor exchange).

[15] See id. at 34; Julia Braun & Martin Zagler, An Economic Perspective on Double Tax Treaties with(in) Developing Countries, 2014 World Tax J. 255 (“[D]eveloping countries sign [dual taxation treaties] with OECD member countries, even though the treaties systematically favour a distribution of the taxes generated from [multinational corporations] to the advantage of the capital-exporting residence country.”).

[16] Martin et al., Cong. Res. Service, R43741, India-U.S. Economic Relations: In Brief 8 (2014).

[17] See Soc. Sec. Admin., supra note 10.

[18] See Ministry of Overseas Indian Affairs, Social Security Agreements, http://web.archive.org/web/20160124174720/http://moia.gov.in/services.aspx?ID1=285&id=m4&idp=81&mainid=73 [https://perma.cc/A6VU-SXZJ]; Editorial Board, India-Australia social pact comes into force, Hindu (Jan. 11, 2016), http://www.thehindu.com/news/international/indiaaustralia-social-pact-comes-into-force/article8092005.ece [https://perma.cc/7BBD-6454].

[19] See Sonu Iyer, Fresh hope for the India-US social security agreement, LiveMint (Oct. 20, 2014), http://www.livemint.com/Money/B3YouUfbXOjVJO36rqmibN/Fresh-hope-for-the-IndiaUS-social-security-agreement.html [https://perma.cc/Z9ZH-HPDY].

[20] See Rajan, supra note 5.

[21] See Editorial Board, US spares Indian professionals from social security, Econ. Times (Feb. 11, 2008), http://articles.economictimes.indiatimes.com/2008-02-11/news/27715941_1_totalisation-social-security-indian-affairs-and-commerce [https://perma.cc/5V63-6G95].

[22] Id.

[23] See Neeru Ahuja & Manju Bhardwaj, India Tax Alert, Deloitte (Oct. 15, 2008) (“The government has now expanded the schemes to apply to ‘international workers,’ which encompasses all employees, except those from countries that have concluded a social security or totalization agreement with India.”).

[24] See Sreekanth A. Nair, US rejects India’s claim in talks on Totalization Pact, Am. Bazaar (Oct. 15, 2015), http://www.americanbazaaronline.com/2015/10/15/us-rejects-indias-claim-in-talks-on-totalization-pact/ [https://perma.cc/5FPG-6B6K].

[25] See Kirkegaard, supra note 4, at 5–6; see also Bureau of Consular Affairs, supra note 3.

[26] Glenn Kessler, Does the United States have $128 trillion in unfunded liabilities?, Wash. Post (Oct. 23, 2013), https://www.washingtonpost.com/news/fact-checker/wp/2013/10/23/does-the-united-states-have-128-trillion-in-unfunded-liabilities/ [https://perma.cc/GBR2-PTWN].

[27] See Kirkegaard, supra note 4.

[28] See Mukul Asher & Amarendu Nandy, Totalisation Agreements Call for Sustained Focus, Daily News & Analysis (Oct. 1, 2008), http://www.dnaindia.com/money/report-totalisation-agreements-call-for-sustained-focus-1194601 [https://perma.cc/R8CE-BDH7].

[29] Id.

[30] See Lubna Tably, India-Canada totalisation agreement kicks in, Times India (Aug. 22, 2015), http://timesofindia.indiatimes.com/business/india-business/India-Canada-totalisation-agreement-kicks-in/articleshow/48602873.cms [https://perma.cc/D8T7-AK99]; Yogima Sharma, India, Australia ink pact to avoid double social security contribution, Econ. Times (Mar. 11, 2016), http://economictimes.indiatimes.com/news/economy/policy/india-australia-ink-pact-to-avoid-double-social-security-contribution/articleshow/51440837.cms [https://perma.cc/F22Q-CHGD].

[31] See H.R. 5387, 114th Cong. (2016), https://www.congress.gov/bill/114th-congress/house-bill/5387/text?q=%7B%22search%22%3A%5B%22totalization%22%5D%7D&resultIndex=5 [https://perma.cc/E27L-JWEF].