Tax Talk: Be aware of social security tax pacts if looking to work abroad
Senior tax professional
Ernst & Young
The global business model requires movement of talent across geographies. With an increasing competitive landscape, the focus on the cost of cross-border employee movement is immense. One of the major cost components is the social security cost in the host country. Fortunately, recent developments in the social security arena have become a blessing for these assignments. Unless there is a social security agreement in force between two countries, an employee of one country working in the other country is required to contribute to the social security of the other (host) country.
Hence, the first thing to check before the start of an assignment is whether the home country has entered into a Social Security Agreement (SSA) with the host country. At present, India has entered into SSA with 17 countries, out of which eight — Belgium, France, Denmark, Korea, Switzerland, Netherlands, Luxembourg and Germany — are in force. A careful reading of the relevant SSA needs to be done as they are worded differently.
To avail exemption from contributing to the host country social security, an employee is required to obtain a Certificate of Coverage (CoC) from the home country. This enables the employee to continue contributing only to the home country social security, thereby reducing the overall cost of assignment. Technically, it is called ‘benefit of detachment’ available under SSA.
In some European countries, the social security cost is a considerable portion of the assignment cost and, hence, obtaining a CoC has a significant financial impact. Although, obtaining a CoC allows exemption from contributing to a large chunk of the social security taxes, there may be a few social taxes that would still have to be paid in the host country. As per Indian social security laws, an Indian employee going to work in a country with which India has entered into a SSA and is eligible to avail social security benefits of that country qualifies as an international worker (IW). Also, a foreign national, holding other than an Indian passport, working in an establishment covered under the Provident Fund (PF) Act would be an IW.
Once a CoC is obtained, the employee going to a country with which India has entered into a SSA will not qualify as an IW and, hence, not required to comply with the IW-related provisions (eg: pension contribution would be on the total monthly pay and not restricted to R6,500). Social security laws for cross-border employees are evolving and the procedural aspects regarding obtaining CoC and other related compliances will get streamlined with time. As of today, the time span for obtaining the CoC varies between different jurisdictional PF offices.
Given India’s role in the global businesses, SSAs are a step in the right direction. The increasing coverage of India SSAs and the focus on streamlining the procedural aspects will help bring more clarity, certainty and cost efficiency in global movements.
* Views are personal