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Practical Tax Considerations Relevant to U.S. Totalization Agreements

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Author(s): Rufus Rhoades and Alexey Manasuev
Date: June 2012

Introduction.

Totalization agreements1 are one of the best kept secrets in the international tax arena. Very few practitioners know they exist and fewer still know what those agreements do. This Emerging Issues Analysis (EIA) will help shed some light on this topic.

Non-resident Alien Employees and FICA in General.

As a general rule, wages paid to a non-resident alien employed within the United States (by an American or foreign employer) are subject to Social Security/Medicare (FICA) taxes. [IRC §§ 3101 through 3510 set forth the rules relating to FICA taxes]. Some special category aliens (for example, employees of foreign governments, students, scholars) are exempt, but the large majority of U.S. based non-resident alien employees are not.

That rule (that is, that wages of a non-resident alien employee are subject to FICA) frequently generates a problem of double taxation for such employee because, still being a resident of his home country, he may well be subject to his home country’s FICA equivalent on his U.S. wages. Totalization agreements are designed to preclude that double taxation.

Totalization Agreements — What They Are.

A totalization agreement is a bilateral treaty between two countries that integrates the social security laws of the host and home countries. The purpose of the totalization agreements is two-fold.

First, to eliminate double social security taxation on citizen/residents of the home country who are posted to the host country and second, to allow workers who divide their careers between the United States and a foreign country to continue to be covered under their home country’s social security system.

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