Taxing the global worker: three spheres of international social security coordination

Virginia Tax Review, Summer, 2006 by Allison Christians

Social security is a fundamental part of workers' lives in three spheres: contributions are required, benefits are hoped for, and taxes on benefits may have to be paid. If a worker splits a career between several countries, each of these three spheres is affected. The United States has sought international coordination through a combination of treaties and executive agreements that address the three spheres in various ways. The result is a group of overlapping and potentially dueling agreements that may raise interpretational issues and create uncertainty for workers and administrators. This article argues that international social security coordination could be improved and possibly expanded through a clearer delineation of the spheres in existing and future international agreements.

I. INTRODUCTION

Income security programs form a part of the social and legal fabric of a majority of countries around the world, including all of the countries with which the United States has strong economic and commercial ties. (1) Every country has distinct policies for funding and distributing the benefits and burdens of its program. Inevitably, these policies collide as workers move between countries, earning income and therefore coming into contact with multiple tax systems. Most workers can obtain some relief from multiple layers of income taxation, as well as a fair amount of certainty regarding their income tax treatment, either through statutory measures provided on a unilateral basis by individual countries or through an income tax treaty. (2) Although social security taxation is also a form of income taxation, (3) only some of its elements are addressed by these coordinative methods, and then only sporadically. Other elements are addressed in a separate, less comprehensive system that intersects with and sometimes overlaps the income tax treaty regime. (4)

Under the United States social security program, workers must make "contributions" based on their current wages and retirees and the disabled are eligible for distributions based on the amount and duration of past earnings from employment. (5) Social security contributions and benefits are the responsibility of two distinct and independent federal agencies: the Social Security Administration (SSA) and the Department of the Treasury, through the Internal Revenue Service (Service). The SSA determines what contributions will be required and how benefits will be distributed. (6) The Service collects contributions by taxing wages and imposes taxes on distributed benefits. Internationally, contributions and benefits eligibility are generally addressed in "totalization" agreements, while relief for double taxation of benefits is generally addressed in income tax treaties. (7)

This article examines how these two procedurally and substantively distinct methods of social security program coordination create a framework that is logical in some respects but that necessarily introduces overlaps, gaps, and administrative complexities, and suggests some ways to achieve a more cohesive approach to coordinating the taxes imposed on global workers. Part II discusses the legal framework and agencies involved in the domestic administration of the social security program. It then explores the scope of social security taxation in international agreements, including how social security contributions and distributions are taxed and how benefits are determined. Part III shows that the bifurcated international approach to social security creates a situation of "dueling agreements" which introduce difficult issues of interpretation and application. This Part proposes coordinating and clarifying changes and considers the impact on existing coordinative efforts that would occur should major changes in the social security program be adopted in the United States. Part IV concludes that while much coordination has been achieved to date, measures should be adopted to mitigate the dueling agreement phenomenon and give greater certainty and clarity to governments, agencies, and cross-border workers and their employers.

II. DOMESTIC ADMINISTRATION AND THE SCOPE OF INTERNATIONAL COORDINATION

The United States social security program consists of benefits collected from taxes on employers, employees, and the self-employed, and distributions paid out to retired workers and their dependents and survivors. (8) There are three aspects, or spheres, of the United States social security program. First, social security contributions are collected from current workers based on their current earnings. (9) Second, social security benefits are calculated based on past contributions and paid to currently retired or disabled workers out of the funds contributed by current workers. (10) Finally, social security benefits received may be subject to income taxation, depending upon the status of the taxpayer. (11)

Other countries have similar systems, but many variations exist, including whether benefits correspond to prior contributions and whether benefits will be subject to taxation. The global worker--one who spends significant amounts of time working in more than one country--may be required to contribute to the social security programs of more than one country during the course of a career. But at retirement, the global worker must satisfy benefits-eligibility requirements that might not take into account amounts contributed to foreign countries.