Business Economics & Services Team (BEST)
Why US Spurns Totalization Agreement?
Among the various vexatious issues that crave for amicable solution is the long pending demand of the Indian IT industry is to have an agreement between the two countries to avoid double taxation for the social security. It is popularly known as Totalization agreement. Interestingly, the US has signed this agreement with more than 30 countries. Once signed, this agreement will enable the expatriates in both countries going on short assignments to pay the social security only in one country. Presently, the Indian expatriates working in US for short duration assignments have to pay social security taxes in both countries. More so, the US social security taxes stipulate that a person has to work for 10 years and complete 65 years to avail the benefits of the tax in terms of old age pension and medical cover. Since the short term assignments are for a maximum of 6to 7 years, most of the Indians forgo their contributions. The amount foregone by Indians annually is estimated between US$ 1.5 billion to US$3 billion.
The forthcoming visit of President Obama has rekindled the demand of India to conclude an agreement for avoidance of social security tax. Some backdrop information is required to know how important is agreement. Prior to 1965, the number of people migrating to the US or going for short assignments were very few. After the relaxation of the immigration rules in 1965, mostly due to the severe labor shortage in that country and the considered view of the US administration to attract talents from all over the world into that country, the visa rules were relaxed. But still the immigration was limited to Indians having at least a degree and mostly preferred people with professional and high qualifications like doctorates, medical professionals etc. Since most of these people were emigrants and had the intention of settling down in the US permanently, social security taxes did not pose a problem to them.
But the immigration landscape changes since 1990's after the software boom in the US. The US had started introducing different types of visas for such professionals to work in that country. Most popular among them is HIB visa, which enabled a software professional to work for a maximum of seven years. Thousands of Indians have availed the H1B visas and started working therein the US on short assignments. That rend continues even now. In the absence of a Totalization agreement, every visa holder will have to pay social security tax there, blocking several billions of dollars there since they work for a maximum of seven years, short of the cut off period of 10 years and thus forgoing the remitted taxes.
Why the US is sulking not to sign the agreement. Foremost is the reason of reciprocity. While a large number of Indians are working in the US on short term visas, the number of Americans working in India is very negligible. Also, in India deduction towards Provident Fund (PF) and Gratuity, the US equivalent of social security tax is optional and most often, the US citizens prefer remuneration packages which do not deduct towards PF or gratuity. So a treaty of this nature is of no significance for the US citizens working in India. On the other hand, absence of an agreement will enable that country to hold on to huge resources, legally, though it may not be sound from the moral stand point. But morality seldom matter in trading relationship. Also, the Indian administration has not taken up this issue earnestly for one reason or the other.
The moot point is: will it come up for discussion at the Obama visit. Experts feel that nothing substantial will be there on Totalization agreement, this time also since there are many challenging issues other than this that may crop up during the bilateral discussions.
Why US Spurns Totalization Agreement?
Among the various vexatious issues that crave for amicable solution is the long pending demand of the Indian IT industry is to have an agreement between the two countries to avoid double taxation for the social security. It is popularly known as Totalization agreement. Interestingly, the US has signed this agreement with more than 30 countries. Once signed, this agreement will enable the expatriates in both countries going on short assignments to pay the social security only in one country. Presently, the Indian expatriates working in US for short duration assignments have to pay social security taxes in both countries. More so, the US social security taxes stipulate that a person has to work for 10 years and complete 65 years to avail the benefits of the tax in terms of old age pension and medical cover. Since the short term assignments are for a maximum of 6to 7 years, most of the Indians forgo their contributions. The amount foregone by Indians annually is estimated between US$ 1.5 billion to US$3 billion.
The forthcoming visit of President Obama has rekindled the demand of India to conclude an agreement for avoidance of social security tax. Some backdrop information is required to know how important is agreement. Prior to 1965, the number of people migrating to the US or going for short assignments were very few. After the relaxation of the immigration rules in 1965, mostly due to the severe labor shortage in that country and the considered view of the US administration to attract talents from all over the world into that country, the visa rules were relaxed. But still the immigration was limited to Indians having at least a degree and mostly preferred people with professional and high qualifications like doctorates, medical professionals etc. Since most of these people were emigrants and had the intention of settling down in the US permanently, social security taxes did not pose a problem to them.
But the immigration landscape changes since 1990's after the software boom in the US. The US had started introducing different types of visas for such professionals to work in that country. Most popular among them is HIB visa, which enabled a software professional to work for a maximum of seven years. Thousands of Indians have availed the H1B visas and started working therein the US on short assignments. That rend continues even now. In the absence of a Totalization agreement, every visa holder will have to pay social security tax there, blocking several billions of dollars there since they work for a maximum of seven years, short of the cut off period of 10 years and thus forgoing the remitted taxes.
Why the US is sulking not to sign the agreement. Foremost is the reason of reciprocity. While a large number of Indians are working in the US on short term visas, the number of Americans working in India is very negligible. Also, in India deduction towards Provident Fund (PF) and Gratuity, the US equivalent of social security tax is optional and most often, the US citizens prefer remuneration packages which do not deduct towards PF or gratuity. So a treaty of this nature is of no significance for the US citizens working in India. On the other hand, absence of an agreement will enable that country to hold on to huge resources, legally, though it may not be sound from the moral stand point. But morality seldom matter in trading relationship. Also, the Indian administration has not taken up this issue earnestly for one reason or the other.
The moot point is: will it come up for discussion at the Obama visit. Experts feel that nothing substantial will be there on Totalization agreement, this time also since there are many challenging issues other than this that may crop up during the bilateral discussions.
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