Totalisation agreements call for sustained focus

Policymakers should not miss the opportunity to improve the conditions of Indians working abroad

The totalisation agreements in the social security sector perform a role similar to the double-taxation treaties in governing income tax arrangements internationally.

Such agreements must ensure that individuals and employers do not end up paying social security taxes or contributions in more than one jurisdiction, or alternatively avoid paying them in any jurisdiction.

More specifically, the agreements must efficiently and equitably address how Indian workers are treated for the payment of social security taxes and for receiving benefits when they are working abroad; and correspondingly how foreign workers are treated while being employed in India.

Efficiency requires that social security taxes be levied in only one tax jurisdiction, preferably in the jurisdiction which pays the benefits. This permits individuals and businesses employing them to better plan their costs, and facilitates retirement financing.

Equity is violated if foreign workers contribute social security taxes in another jurisdiction, but does not qualify for social security benefits and does not receive contributions made to the foreign jurisdiction when returning home.

In the US, for example, a worker needs to contribute for a minimum period of 40 quarters to qualify for social security and survivors’ benefits.

Due the relatively short duration of service in the US, many Indian professionals fail to meet the criterion, though they are required to contribute to the US social security system.

In the absence of totalisation agreement with India, the social security taxes paid by Indian nationals in the US are not returned even if they do not qualify for social security benefits.

In practice, an Indian company that deputes its employees abroad guarantees a non-reduction in disposable income.

Essentially this means that the employer agrees to pay both the employer and the employee share of the host country social security taxes on behalf of its deputed professionals.

This raises business costs, thereby adversely affecting competitiveness of Indian companies at the time when competition is intensifying. India-US CEO Forum in 2006 estimated that over $500 million is contributed annually by Indian companies to the US Social Security system, with no benefits to its employees.

In absence of such an arrangement between the employer and the employee, the employee’s after-tax income is reduced, resulting in inequity.

The two-way flow of workers between India and the rest of the world is projected to increase due to two reasons. India currently receives inward flow of remittances of around $30 billion, while the outflow from India is around $2 billion. These amounts are expected to grow with the increase in two-way flow of workers.

First, India’s current demographic profile exhibits a steady rise in the share of working-age population to total population. It is projected that by 2020, India will have the largest talent surplus in the world of nearly 50 million persons. In contrast, many high income countries such as those in the European Union, Japan and the US will have talent deficit.

This, along with limited increases in the supply of higher quality education and well-paid professional jobs has led an increasing number of Indians to study and work abroad.
Second, as Indian companies globalise, and expand their scale and scope through mergers and acquisitions, they would continue to increasingly source talent from across the world to be competitive.

Also, according to World Investment Report 2008, published by the United Nations Conference on Trade and Development (Unctad), India has retained its position as the second most-preferred global destination for foreign investment in 2008, and is projected to do so in the short to medium term. As India is projected to remain an attractive destination for foreign companies, the number of foreign professionals working in India is also expected to increase.

As two-way flow of workers and the level of remittances increases, the need for totalisation agreements has become even more urgent. The absence of such agreements is resulting in large revenue loss to the country; reducing competitiveness of Indian businesses; and adversely impacting on the retirement security of the Indian workers.
India has made a modest beginning in this regard. It signed its first totalisation agreement with Belgium on November 3, 2006. In November 2007, Administrative Arrangements were finalised between the two countries.

The two countries should demonstrate greater sense of urgency to actually operationalise the Agreement.

Under the Agreement, Indian citizens are exempted from contributing towards the Belgium social security scheme if they are employed for less than 5 years, and if they continue to contribute towards the social security scheme in India.

The totalisation agreement also provides that Indians working in Belgium, and contributing towards the Belgium social security scheme, will be able to repatriate contributions back to India. The agreement also covers self-employed Indians in Belgium; and Indian professionals going to Belgium from a third country (e.g. US).

India expects to use the India-Belgium model for signing similar agreements with other EU countries. In the most recent instance, on September 18, 2008, the Indian Cabinet approved signing a social security arrangement with France, designed to deliver similar benefits to Indian nationals working in France.

Negotiations are underway with Germany and the Netherlands. The process has also been initiated with Czech Republic, Sweden, Bulgaria, Switzerland, Norway and Cyprus. India should move towards integrating totalisation agreements while negotiating bilateral trade agreements.

In December 2007, India and US have agreed to begin expert level talks in 2008 on this issue. US has Totalisation Agreements with 21 countries including Korea, Japan, Chile and Spain. As India and US recognise the importance of closer engagement, greater urgency in concluding the Totalisation Agreement, broadly along similar lines as with Belgium, is required.

The totalisation agreements are being negotiated by the Ministry of Overseas Indian Affairs, the Ministry of External Affairs, and the Employees Provident Fund Organization (EPFO).

India should aggressively project the EPFO as its national social security agency, and ensure that it acquires commensurate capabilities to effectively negotiate technicalities and implement such agreements. The EPFO should also give high priority to substantially improving the quality of its services to the members; and modernize its governance structure.

The totalisation agreements require sustained focus with the objective of substantially reducing the time-lag between initiation of the discussions and actual implementation. The policymakers should not miss any opportunity to improve living and working conditions of Indian citizens abroad; to enhance competitiveness of Indian businesses; and to sustain India’s attractiveness as an investment destination.

Mukul Asher is professor of public policy, National University of Singapore, and Amarendu Nandy a PhD candidate in public policy, National University of Singapore.
sppasher@nus.edu.sg
amarendun@gmail.com