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back to index backASIAtalk June,  2005

U.S. – Japan Social Security Agreement

The U.S. – Japan Social Security Agreement was concluded on February 19, 2004 and is scheduled to enter into force in the fall 2005. The Social Security Agreement will eliminate dual social security taxation, as well as make it possible for residents of the US and Japan to qualify for social security benefits based on their combined credits from having worked in both countries during their careers.

In the past, lack of a social security agreement between the U.S. and Japan has resulted in a dual social security liability for expatriate workers. This occurred because both the U.S. and Japanese social security systems include extra-territorial provisions that continue to subject the earnings of their citizens or residents employed overseas to social security tax. This has been especially costly for Japanese employers offering tax equalization programs since social insurance payments continue to be made in Japan on behalf of Japanese assignees (to maintain an uninterrupted payment history) while also making the required contributions under the U.S. social security system.

On the other hand, contributions to Japan's social insurance system are rarely made on behalf of U.S. expatriates by their U.S. employers. The reason this occurs is, despite the social insurance liability that arises from expatriates working in Japan, most U.S. assignees are not paid through a Japanese payroll system (rather, U.S. assignees generally continue to be paid through their employer's U.S. payroll system) and no other mechanism exists for making the payments. As a result, no social insurance contributions are generally made on behalf of U.S. assignees.

The U.S. – Japan Social Security Agreement is intended to resolve this dual social security burden for the Japanese assignee, and effectively legitimize the current practice of non-payment for the U.S. assignee, by way of the General Territorial Rule” and the Temporary Expatriation Rule.”

Under the general territorial rule, expatriates would contribute to the social security system of their host” country during their assignment. To apply the general territorial rule, it will be necessary to apply for an exemption from the social security system of the home” country by obtaining a Coverage Letter” from the host country social security administration. For example, a U.S. expatriate assigned to Japan under the general territorial rule would be required to obtain a coverage letter from Japan's social insurance office, which, in the event of an audit, would be submitted to the U.S. Social Security Administration as proof of coverage under the Japan's social insurance system during the assignment period.

Under the temporary expatriation rule an expatriate on assignment for a term of five years or less would be exempt from contributing to the social insurance system of the host country as long as he continued to contribute to the social security system of his home country.

To apply thetemporary expatriation rule, it will be necessary to receive a Certificate of Continuing Coverage” from the expatriate's home country. Because social security tax will not be withheld in the host country, the company should keep the Certificate of Continuing Coverage in the host country. Therefore, for a U.S. expatriate working in Japan who continues to be covered under the U.S. Social Security program under the temporary expatriation rule, the employer should keep the Certificate of Continuing Coverage in Japan.

In addition to eliminating the dual social security tax burden, the U.S. – Japan Social Security Agreement will also protect benefit eligibility for workers who have divided their careers between the U.S. and Japan. Generally speaking, a person's benefits would be determined by crediting a worker's time spent contributing to either system while employed. Therefore, a U.S. expatriate that did contribute to the Japanese social insurance system while he was employed, and earned twenty-five years of coverage under both systems may be eligible to receive benefits from both countries. Alternatively, Japan may refund a portion of the premium paid in circumstances where a foreign national returns to his home country prior to receiving any social security benefit from Japan.

The amount of any such refund would depend upon the length of time a person was covered under the Japanese social security system and the amount of premiums contributed. Similarly, a Japanese assignee meeting certain work and contribution requirements set by the U.S. Social Security Administration could likewise qualify for benefits under the U.S. social security system in addition to any benefits received from Japan.

Source: Deloitte -

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