U.S.-Japan International Social Security Agreement

November 8, 2005

On October 1, 2005, Japan became the latest country to be added to the list of states with which the United States of America has Social Security Agreements in effect. To date the U.S. has entered into twenty-one of these agreements, the oldest of which is the treaty with Italy—it went into effect in 1978. In the meantime, the U.S. entered into Social Security Agreements with Germany, Switzerland, Belgium, Norway, Canada, United Kingdom, Sweden, Spain, France, Portugal, Netherlands, Austria, Finland, Ireland, Luxembourg, Greece, South Korea, Chile, Australia and Japan.

Also known as Totalization Agreements, Social Security Agreements have two main purposes. In the first place, they eliminate dual Social Security Taxation. Dual Social Security Taxation occurs when a worker is forced to pay Social Security Taxes on the same income in two different countries. Secondly, the agreements fill gaps in benefit protection for workers who have divided their careers between two countries, both of which levy Social Security Taxes. Without such an agreement, a worker who has paid social security taxes in a foreign country, could end up being unable to claim benefits from a system into which he was forced to make contributions. A situation could also occur where a worker who has paid Social Security Taxes in both states will be unable to claim benefits in one or the other, because he or she has not earned enough credits in one of the two systems. The terms of a Social Security Agreement allow a worker to add credits earned under both treaty countries’ social security systems, enabling the worker to become eligible for benefits.

Social Security Agreements also lessen the cost of transferring workers between countries that levy Social Security Taxes. If an employer guarantees that an employee’s transfer will not result in a reduction of an employee’s after-tax income, the employer will have to compensate the employee for the increase in taxes paid by the employee. Needless to say, this adds to the cost of transferring an employee to the other country.

The U.S.-Japan Social Security Agreement distinguishes among people transferred by a company to work in the other state’s territory (e.g., a U.S. company transfers a worker to Japan), nationals employed by their government (e.g., a Japanese citizen working in Japan’s U.S. Embassy), self employed persons, and persons hired in their country of employment by a firm based in one of the states party to the agreement (e.g., a U.S. company hires a Japanese national to work in Japan). Per the U.S.-Japan Social Security Agreement, a worker will be exempt from paying dual taxes on the same income if the period of employment in the other country is not more than five years. It is also worth noting that the agreement allows for an extension beyond this five-year period, but one will have to apply for such an extension with the relevant authorities.

Employers cannot simply stop making social security deductions. To establish exemption from compulsory coverage and taxes in a particular member state, an employer must first obtain a certificate of coverage. This certificate serves as proof of exemption from social security taxes on the same earnings in the other country. The effective date of exception from paying social security taxes will be indicated on the document.

To establish an exemption from taxes under the Japanese system, a U.S. employer must request a certificate of coverage (form USA/J6) from The Social Security Administration's Office of International Programs. No special form is required to request a certificate, but the request must be in writing and must provide, inter alia, the following information: full name of worker, date and place of birth, citizenship, country of worker's permanent residence, U.S. social security number, date and country of hire, etc. A statement as to whether the employee, while working in Japan, will be employed by the U.S. company or its Japanese affiliate, and information about an employee’s health insurance coverage also need to be provided.

To establish exemption under U.S. Social Security coverage, a Japanese employer must also request a certificate of coverage (form J/USA6) from the local Japanese Social Insurance Agency that collects a particular employee's social security taxes in Japan. Save for a few exceptions, the same information as required by the U.S. Social Security Administration must be provided to the Japanese authorities. Certificates issued in Japan will be drafted using Japanese characters; it will be the employer’s responsibility to have it translated into English.

As mentioned earlier, not only do Social Security Agreements benefit employees, but they also reduce the cost of transferring personnel between countries that levy Social Security Taxes. It is therefore important that any institution with operations in more than one country be aware of these Agreements’ existence, and when they apply.