In an opinion issued on June 20, 2023, the United States Court of Federal Claims reminded taxpayers that they must obtain a certificate of coverage in order to claim an exemption from Social Security and Medicare taxes (FICA) under a totalization agreement.
Totalization agreements between the United States and other nations limit dual social taxes a worker is required to pay on the same earnings in more than one country. These agreements also fill gaps in benefit protection when workers have divided their careers between the United States and another country. The exemption under a totalization agreement applies when a U.S. employer sends a U.S. citizen to another country or an employer in another country sends one of its citizens to the United States. The United States currently has totalization agreements with 30 countries.1
In Bond v. United States, the court rejected a request for the refund of FICA taxes paid by Australians who lived in the United States from 2017 to 2020 while working for an Australian employer. Thomas Bond paid FICA while also paying equivalent social taxes to Australia. While Australia and the United States have a totalization agreement, neither his employer nor Bond obtained a certificate of coverage. Instead, he had a tax preparer file a refund claim with a declaration noting he was subject to Australian social taxes. While the IRS allowed one claim by Bond, it rejected his second.
The legal issue before the court was whether a certificate of coverage was required to qualify for the exemption, with Bond arguing that the totalization agreement is self-executing, thus obviating the need for a certificate of coverage in light of other proof he was subject to the Australian taxes. The IRS argued that while Bond may have been entitled to the exemption, he was obligated to obtain a certificate of coverage in order to qualify for it.
The court rejected Bond’s position, noting first that a Social Security Administration (SSA) regulation provides, “proof of coverage under one social security system may be required before the individual may be exempt from coverage under the other system.”2 The court next cited IRC section 3101, which also states that wages are exempt from FICA “to the extent that such wages are subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.” The court then relied upon Revenue Procedure 80-56, Section 4: “In order to substantiate an exemption from the taxes imposed by the FICA . . . the employer must obtain a statement issued by a duly authorized official or agency of the foreign country involved.”3 A subsequent Revenue Procedure added: “[i]f the foreign country will not issue such a statement, either the employer or the employee should secure a statement issued by [SSA] stating that the employee’s wages . . . are not covered by the United States Social Security System.”4
The court also cited the SSA’s and IRS’s websites as interpretative guidance. The SSA website states “[w]orkers who are exempt from U.S. or foreign Social Security taxes under an agreement must document their exemption by obtaining a certificate of coverage from the country that will continue to cover them.”5 The IRS website states:
If the employee is an alien who wishes to claim an exemption from [FICA] because of the Totalization Agreement he/she must secure a Certificate of Coverage from the social security agency of [Australia] and present such Certificate of Coverage to his employer in the United States, according to the procedures set forth in Revenue Procedures 80-56, 84-54 and Revenue Ruling 92-9. An alternate procedure is provided in these revenue procedures for an alien who is unable to secure a Certificate of Coverage from his home country. . . . . This statement should be kept by the employer because it establishes that this employee's pay is exempt from U.S. Social Security tax.6
Turning to the specific case, the court found that “[u]fortunately for Mr. Bond, his employer did not request a certificate of coverage demonstrating that he was subject to Australia’s social security system. Nor did Mr. Bond pursue the alternative procedure offered by Revenue Procedure 80-54.” While noting that the SSA’s regulation “was not explicit” that a certificate of coverage was the “exclusive means of proof,” both SSA and IRS interpretative guidance made clear a certificate of coverage was required. The court concluded its analysis by applying rules of interpretation:
We view the word “must” as limiting proof to an officially generated certificate. Although this interpretive guidance is not legally binding on the court, it reflects the understanding of both United States agencies with enforcement responsibility. As defendant points out, this construction is shared by the corresponding Australian agency and such a shared understanding can be used by the court as an interpretive aid. See Sumitomo Shoji Am., Inc. v. Avagliano, 457 U.S. 176, 185 (1982). And defendant is also correct that the exemption from what would otherwise be the obligation to pay FICA taxes in the United States should, like all exemptions, be narrowly construed. Mayo Found. for Med. Educ. & Rsch. v. United States, 562 U.S. 44, 59-60 (2011).
This case is an important reminder to employers sending employees to work aboard – whether U.S. employers sending employees outside the United States or non-U.S. employers sending employees to work in the United States – that obtaining a certificate of coverage is necessary to claim the exemption from dual social taxes. For U.S. employers, a certificate of coverage can be obtained online at the SSA’s website, or by mail or fax. All totalization agreements are also available on the SSA’s website. If an employer declines or fails to obtain a certificate of coverage, the individual worker can obtain one by following the process set out in Revenue Procedure 80-54. Employers should make obtaining a certificate of coverage a standard step in any expatriate process.
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