Tax Alert - August 29, 2018

It was recently announced that the Social Security Totalization Agreement (SSTA) between the US and Brazil will finally come into effect on October 1, 2018. It is estimated that approximately 1.3 million Brazilians and 35,000 Americans will benefit from this agreement.

For nationals of Brazil and the United States who have worked in both locations, this agreement will be beneficial in helping to meet the qualification requirements for certain retirement, disability, and survivor’s benefits (totalization of benefits). In addition, the agreement addresses potential double social security taxation for cross-border employment scenarios.

Totalization of benefits

SSTA will help individuals who have worked in both countries, but who may not have met the basic eligibility requirements to qualify for benefits in one or both countries.

For example, the US social security system requires 40 quarters of contributions in order to be eligible to receive social security benefits. An employee with 20 quarters of coverage in the US and 20 quarters of coverage in Brazil previously would not have had the required period of coverage to receive US social security benefits. Under the agreement, the employee’s 20 work credits in Brazil would help them reach the US threshold needed to qualify for partial benefits under the US system. The 20 US work credits would also be considered in determining the employee’s eligibility for partial benefits from Brazil.

Reduction of possible double social security taxation

Before to SSTA, it was possible that a national of one country working in the other country would be subject to social security taxation on the same income in both locations. Under SSTA, a worker will only pay social security in one location, generally the location where they are working and providing services.

In addition, if an employee is sent to work in the other country on a temporary basis (generally up to five years) for the Home country employer or an affiliate, the employee can stay on Home country social security and achieve an exemption from social security tax in the Host location. Employees who can take advantage of this “detached worker” exception would apply for a Certificate of Coverage with their Home country social security administration.

For self-employed individuals, the agreement provides for taxation in the country of residence.

SSTA covers the old age, disability, and survivor’s benefit provision under both country’s social security systems. It should be noted that the agreement does not cover participation in Brazil’s Government Severance Indemnity Fund (commonly referred to as FGTS). FGTS is funded by mandatory employer contributions equivalent to 8% of an employee’s salary.

Next steps

Companies with new or existing expatriates who may be impacted by SSTA will need to file for Certificates of Coverage as soon as the respective US and Brazil social security authorities begin to accept applications. The coverage period for purposes of the five-year “detached worker” exception will begin on October 1, 2018 for eligible workers sent to work in the other location prior to the date of enactment.

GTN and its supporting Brazil tax offices can assist with this. If you have questions or would like further information, please contact us at info@gtn.com or +1.888.486.2695, or visit our Mobility Tax Services page to see what assistance we can provide.

The information provided in this alert is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.