Understanding totalization for expats Understanding totalization for expats

Understanding totalization for expats
31 Mar 2015

Do you totally understand totalization? Celergo’s Michele Honomichl explains the real meaning behind this key expatriate concept and answers some common questions. 

The first item to know about totalization is that spell check does not recognize it as a word. Yes, the red squiggly underscore might drive you crazy, but it is a real word, a real concept and a very key programme for companies with expatriates. Similar in concept is the A1 (old E101) certification programme for employees working in the European Economic Area (EEA).

So what is a totalization agreement and why is it important?

When an expatriate leaves his home country to work in another country, he must pay taxes at his host location. Typically these host taxes include federal/income taxes and social taxes, which are comprised of coverage for health, pension, life insurance, etc.

Since expatriates inherently will return home after a one to five year period, paying into a statutory pension scheme from which they will never benefit seems to be a foolhardy pursuit. Therefore countries have created social security agreements whereby expatriates continue to pay into their home social security scheme and are thus exempt from paying social security taxes in the host country.

Since many companies as a general practice, keep their expatriates on their home social security plans anyway to ensure the employee continues to earn credits in his home country for social security, many companies would be faced with double taxation if totalization agreements were not in place. 

So what would be the cost to a company if totalization agreements did not exist?

Companies would indeed be required to cover both home and host social security taxes. In some countries, social security taxes are very low - only a few percentage points to very high - as much as thirty plus per cent. In the host country, the company typically would be paying the employee’s portion in addition to the employer’s portion of the social security obligation.

Of course the employee’s portion would be considered income to the employee and would need to be grossed-up by the employer. Therefore this can be a very costly programme if the company is already paying the match in the home, the match at the host and then grossing-up the employee’s portion of the social taxes, which can be as much as 30 per cent of the employee’s pay!

The advent of the totalization concept has allowed countries to interchange their highly talented employees to the benefit not only of the companies, but the employees and countries as well. 

What does a company need to do to adhere to these social security agreements?

In Europe, the employee will need to obtain an A1 Certificate. The A1 is the replacement for the old E101 certificate. This will allow an expatriate to work in an EEA country, which is comprised of the European Union plus Iceland, Liechtenstein and Norway.

If an expatriate is from the United States, he must obtain a Certificate of Coverage (COC) for the time period he will be on assignment. These forms can in many cases be applied for online. When an employee has an A1 or COC, the employer must withhold that employee’s social taxes in the home country and stop the withholding/payment of social taxes in the host country.

Does every country have totalization agreements or honour A1’s?

Unfortunately not every country combination that has expatriates has social security agreements. The A1 covers the EEA, and the United States has totalization agreements in place with 25 countries. If either of these programmes are not in place, then the company will have to pay double taxes or perhaps consider different types of host based expatriate compensation programs to contain costs depending on the country combinations.

Totalization is a simple concept that started with the United States and Italy in 1978 and spread to multiple countries, combinations and certifications since. It allows companies to protect employees’ social security interests at home, while making it economical for companies to send them abroad to work.

With totalization being such a long standing and important programme that is beneficial to employees and international trade alike, you would think the dictionary would have caught up by now.

  Celergo’s Michele Honomichl

Do you totally understand totalization? Celergo’s Michele Honomichl explains the real meaning behind this key expatriate concept and answers some common questions. 

The first item to know about totalization is that spell check does not recognize it as a word. Yes, the red squiggly underscore might drive you crazy, but it is a real word, a real concept and a very key programme for companies with expatriates. Similar in concept is the A1 (old E101) certification programme for employees working in the European Economic Area (EEA).

So what is a totalization agreement and why is it important?

When an expatriate leaves his home country to work in another country, he must pay taxes at his host location. Typically these host taxes include federal/income taxes and social taxes, which are comprised of coverage for health, pension, life insurance, etc.

Since expatriates inherently will return home after a one to five year period, paying into a statutory pension scheme from which they will never benefit seems to be a foolhardy pursuit. Therefore countries have created social security agreements whereby expatriates continue to pay into their home social security scheme and are thus exempt from paying social security taxes in the host country.

Since many companies as a general practice, keep their expatriates on their home social security plans anyway to ensure the employee continues to earn credits in his home country for social security, many companies would be faced with double taxation if totalization agreements were not in place. 

So what would be the cost to a company if totalization agreements did not exist?

Companies would indeed be required to cover both home and host social security taxes. In some countries, social security taxes are very low - only a few percentage points to very high - as much as thirty plus per cent. In the host country, the company typically would be paying the employee’s portion in addition to the employer’s portion of the social security obligation.

Of course the employee’s portion would be considered income to the employee and would need to be grossed-up by the employer. Therefore this can be a very costly programme if the company is already paying the match in the home, the match at the host and then grossing-up the employee’s portion of the social taxes, which can be as much as 30 per cent of the employee’s pay!

The advent of the totalization concept has allowed countries to interchange their highly talented employees to the benefit not only of the companies, but the employees and countries as well. 

What does a company need to do to adhere to these social security agreements?

In Europe, the employee will need to obtain an A1 Certificate. The A1 is the replacement for the old E101 certificate. This will allow an expatriate to work in an EEA country, which is comprised of the European Union plus Iceland, Liechtenstein and Norway.

If an expatriate is from the United States, he must obtain a Certificate of Coverage (COC) for the time period he will be on assignment. These forms can in many cases be applied for online. When an employee has an A1 or COC, the employer must withhold that employee’s social taxes in the home country and stop the withholding/payment of social taxes in the host country.

Does every country have totalization agreements or honour A1’s?

Unfortunately not every country combination that has expatriates has social security agreements. The A1 covers the EEA, and the United States has totalization agreements in place with 25 countries. If either of these programmes are not in place, then the company will have to pay double taxes or perhaps consider different types of host based expatriate compensation programs to contain costs depending on the country combinations.

Totalization is a simple concept that started with the United States and Italy in 1978 and spread to multiple countries, combinations and certifications since. It allows companies to protect employees’ social security interests at home, while making it economical for companies to send them abroad to work.

With totalization being such a long standing and important programme that is beneficial to employees and international trade alike, you would think the dictionary would have caught up by now.

  Celergo’s Michele Honomichl