{"id":2510,"date":"2016-08-26T12:00:20","date_gmt":"2016-08-26T12:00:20","guid":{"rendered":"http:\/\/journals.law.harvard.edu\/jol\/?p=2510"},"modified":"2021-12-04T13:03:47","modified_gmt":"2021-12-04T18:03:47","slug":"social-insecurity-the-case-for-totalization-with-india","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/jol\/2016\/08\/26\/social-insecurity-the-case-for-totalization-with-india\/","title":{"rendered":"Social Insecurity: The Case for Totalization With India"},"content":{"rendered":"

Social Insecurity: The Case for Totalization With India<\/strong><\/p>\n

By Josh Craddock, JD \u201818<\/p>\n

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\u2019 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.<\/a> Last year, U.S.-India trade reached $107 billion, up from $60 billion in 2009.[2]<\/a> 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.<\/p>\n

In 2015, more than 275,000 Indian nationals were admitted to the United States on temporary worker visas.[3]<\/a> Indians using H-1B and L-1 visas annually contribute approximately $3 billion to the American Social Security system\u2014contributions from which they cannot receive retirement or disability benefits, and which they cannot repatriate to their home country\u2014in addition to their payments into India\u2019s Social Security system.[4]<\/a> And this estimate does not include additional contributions made by these workers\u2019 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]<\/a><\/p>\n

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\u2019s Employees\u2019 Provident Fund Organization (EPFO) was $150 million in 2011.[6]<\/a> 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]<\/a> These contributions must be matched by an equal amount from the American citizen\u2019s 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]<\/a><\/p>\n

This problem of taxation without benefit eligibility is compounded when one considers that employers are required to match their employees\u2019 Social Security contributions in both countries\u2014a total tax rate of 19.65% of an employee\u2019s salary.[9]<\/a> Employers that guarantee that an overseas assignment will not decrease their employee\u2019s after-tax income are particularly affected. These employers pay both the employer and the employee Social Security contributions, but this payment is treated as \u201ctaxable compensation to the employee, thus increasing the employee’s income tax liability.\u201d[10]<\/a> <\/a> The employer will often pay the additional income tax, which creates what the Social Security Administration calls a \u201cpyramid effect\u201d that, depending on the tax rate, can increase the employer\u2019s foreign social security costs to as much as 65-70% of an employee’s salary.[11]<\/a><\/p>\n

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.<\/p>\n

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]<\/a> This sort of dual taxation hurts economic growth and may actually reduce tax revenue.[13]<\/a> 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]<\/a><\/p>\n

Developed countries like the United States typically benefit more<\/em> from totalization agreements than developing countries,[15]<\/a> but Indian officials believe the agreement would help their nation, as well. They report that the lack of a totalization agreement \u201cincreases the cost of hiring Indian nationals,\u201d discourages Indian workers from seeking employment in the United States, and \u201coperates as a market barrier for Indian companies considering entry into the U.S. market.\u201d[16]<\/a> 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\u00a0or \u201ctotalize\u201d the two systems?<\/p>\n

Currently, the United States has totalization agreements with twenty-five countries, including South Korea, Belgium, Czech Republic, and Japan.[17]<\/a> India has totalization agreements with nineteen, all but one of which overlap with those with which the United States has signed agreements.[18]<\/a> 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]<\/a><\/p>\n

The current barrier to enacting such an agreement is the American objection that the two nations\u2019 Social Security systems are incompatible because India\u2019s EPFO does not cover 50% of the nation\u2019s working population\u2014most of which is employed informally.[20]<\/a> But the United States\u2019 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\u2019s EPFO to draw parallels between the two systems and to ensure a smooth repatriation system.[21]<\/a> The joint team\u2019s ensuing report outlined a plan to integrate the two systems if a totalization agreement were eventually passed.[22]<\/a> 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]<\/a><\/p>\n

In truth, the hold-up likely stems from the United States\u2019 unwillingness to allow repatriation of benefits before workers establish ten years of legal permanent residency.[24]<\/a> 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.<\/a> The U.S. and Indian governments are not only doubly taxing overseas workers\u2019 social security contributions; they are also taxing workers\u2019 patience with endless negotiations.<\/p>\n

American reticence to reduce the residency requirement may be partly due to worries about Social Security\u2019s towering deficit of unfunded liabilities. That deficit\u2014conservatively estimated at $23.1 trillion[26]<\/a>\u2014would exist with or without the comparatively paltry contributions from Indian workers.[27]<\/a> 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.<\/p>\n

Professor Mukul Asher, a public policy expert from the National University of Singapore, suggests a middle ground that would serve both parties.[28]<\/a> He argues that a totalization agreement created along similar lines as India\u2019s agreement with Belgium would be an effective model for the United States.[29]<\/a> 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]<\/a><\/p>\n

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\u2019s proposal for requiring the Secretary of State to provide Congress with updates on totalization negotiations is a good first step.[31]<\/a> 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.
\n<\/p>\n

\"craddock_graph_2\"<\/p>\n

\"craddock_graph_1\"<\/p>\n

[1]<\/a> See<\/em> Bureau of Econ. Analysis, U.S. Dep\u2019t of Commerce, U.S. Trade in Goods and Services by Selected Countries and Areas, 1999-present<\/em> (June 3, 2016), http:\/\/www.bea.gov\/newsreleases\/international\/trade\/trad_geo_time_series.xls [https:\/\/perma.cc\/ZL9H-PDN4].<\/p>\n

[2]<\/a> Id.<\/em><\/p>\n

[3]<\/a> 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<\/em> Bureau of Consular Affairs, U.S. Dep\u2019t of State, Nonimmigrant Visa Statistics: Nonimmigrant Visa Issuances by Visa Class and by Nationality<\/em> (2015), https:\/\/travel.state.gov\/content\/dam\/visas\/Statistics\/Non-Immigrant-Statistics\/NIVDetailTables\/FY15%20NIV%20Detail%20Table.pdf [https:\/\/perma.cc\/FWK4-YMXL].<\/p>\n

[4]<\/a> See <\/em>Jacob Funk Kirkegaard, The Economic Scope and Future of US-India Labor Migration Issues <\/em>26 (Peterson Inst. for Int\u2019l Econ. Working Paper Series, Working Paper No. 15-1, 2015), https:\/\/piie.com\/publications\/wp\/wp15-1.pdf [https:\/\/perma.cc\/B7LJ-48XC].<\/p>\n

[5]<\/a> 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<\/em> id.<\/em> at 26 (showing the employee FICA rate to be 7.65%), 44\u201345 (showing that such visa-holders earned $361.2 billion). See also <\/em>Sujeet Rajan, Best \u2018gift\u2019 Narendra Modi can give to NRIs in the US: Totalization pact on social security taxes<\/em>, 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).<\/p>\n

[6]<\/a> See <\/em>ET Bureau, Indians in US may get to bring back social security contribution<\/em>, 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<\/em> Condoleezza Rice, Our Opportunity With India<\/em>, Wash. Post (Mar. 13, 2006), http:\/\/www.washingtonpost.com\/wp-dyn\/content\/article\/2006\/03\/12\/AR2006031200978.html [https:\/\/perma.cc\/2HB6-MGM6].<\/p>\n

[7]<\/a> See <\/em>Liz Mathew, Govt mandates EPF for foreign workers<\/em>, 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].<\/p>\n

[8]<\/a> See<\/em> Kirkegaard, supra<\/em> note 4, at 25\u201326; Social Security and The Overseas American<\/em>, 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] (\u201cForeign 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.\u201d).<\/p>\n

[9]<\/a> See<\/em> Mathew, supra<\/em> note 7 (noting that American workers\u2019 12% contributions to India\u2019s EPFO are matched by employers); Understanding Employment Taxes<\/em>, 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).<\/p>\n

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

[11]<\/a> See<\/em> id.<\/em><\/p>\n

[12]<\/a> See<\/em> Michael Lang & Jeffrey Owens, The Role of Tax Treaties in Facilitating Development and Protecting the Tax Base<\/em> 35 (WU Int\u2019l Taxation Research Paper Series No. 2014-03, 2014) (\u201cSurveys 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.\u201d).<\/p>\n

[13]<\/a> See<\/em> Mar\u00eda Amparo Grau Ruiz, Mutual Assistance for the Recovery of Tax Claims 105 (2003) (\u201cInternational double taxation causes distortions which are harmful to the economy and indirectly reduces tax revenue.\u201d); C. Fred Bergsten, Transcript: Assessing the Future of U.S.-India Relation<\/em>s<\/em>, Council on Foreign Relations (Nov. 17, 2015), http:\/\/www.cfr.org\/india\/assessing-future-us-india-relations\/p37245 [https:\/\/perma.cc\/6Q6G-NAJ8] (\u201cIn economic terms, it would make great sense for the U.S. to liberalize . . . on totalization.\u201d).<\/p>\n

[14]<\/a> See<\/em> Lang & Owens, supra<\/em> note 12, at 14\u201317 (noting that cross-jurisdictional tax regimes \u201chave a significant influence on decisions about the location of production and investment\u201d and that taxation agreements \u201ccan support the promotion of cross-border activities\u201d such as foreign direct investment and labor exchange).<\/p>\n

[15]<\/a> See id.<\/em> at 34; Julia Braun & Martin Zagler, An Economic Perspective on Double Tax Treaties with(in) Developing Countries<\/em>, 2014 World Tax J. 255 (\u201c[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.\u201d).<\/p>\n

[16]<\/a> Martin et al., Cong. Res. Service, R43741, India-U.S. Economic Relations: In Brief 8 (2014).<\/p>\n

[17]<\/a> See<\/em> Soc. Sec. Admin., supra <\/em>note 10.<\/p>\n

[18]<\/a> See <\/em>Ministry of Overseas Indian Affairs, Social Security Agreements<\/em>, 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<\/em>, Hindu (Jan. 11, 2016), http:\/\/www.thehindu.com\/news\/international\/indiaaustralia-social-pact-comes-into-force\/article8092005.ece [https:\/\/perma.cc\/7BBD-6454].<\/p>\n

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

[20]<\/a> See<\/em> Rajan, supra<\/em> note 5.<\/p>\n

[21]<\/a> See <\/em>Editorial Board, US spares Indian professionals from social security<\/em>, 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].<\/p>\n

[22]<\/a> Id.<\/em><\/p>\n

[23]<\/a> See <\/em>Neeru Ahuja & Manju Bhardwaj, India Tax Alert<\/em>, Deloitte (Oct. 15, 2008) (\u201cThe government has now expanded the schemes to apply to \u2018international workers,\u2019 which encompasses all employees, except<\/em> those from countries that have concluded a social security or totalization agreement with India.\u201d).<\/p>\n

[24]<\/a> See <\/em>Sreekanth A. Nair, US rejects India\u2019s claim in talks on Totalization Pact<\/em>, 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].<\/p>\n

[25]<\/a> See<\/em> Kirkegaard, supra<\/em> note 4, at 5\u20136; see also<\/em> Bureau of Consular Affairs, supra<\/em> note 3.<\/p>\n

[26]<\/a> Glenn Kessler, Does the United States have $128 trillion in unfunded liabilities?<\/em>, 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].<\/p>\n

[27]<\/a> See<\/em> Kirkegaard, supra<\/em> note 4.<\/p>\n

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

[29]<\/a> Id.<\/em><\/p>\n

[30]<\/a> See <\/em>Lubna Tably, India-Canada totalisation agreement kicks in<\/em>, 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<\/em>, 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].<\/p>\n

[31]<\/a> See<\/em> 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].<\/p>\n","protected":false},"excerpt":{"rendered":"

Social Insecurity: The Case for Totalization With India By Josh Craddock, JD \u201818 Death and taxes are inevitable, but at […]<\/p>\n","protected":false},"author":101984,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[27,28],"tags":[],"class_list":["post-2510","post","type-post","status-publish","format-standard","hentry","category-jol-commentary","category-jol-online"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/peZQ7o-Eu","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/posts\/2510","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/users\/101984"}],"replies":[{"embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/comments?post=2510"}],"version-history":[{"count":0,"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/posts\/2510\/revisions"}],"wp:attachment":[{"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/media?parent=2510"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/categories?post=2510"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/journals.law.harvard.edu\/jol\/wp-json\/wp\/v2\/tags?post=2510"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}