Tag Archives: Taxation

New Tax System Being Introduced in Cuba

On November 21, Cuba’s Gaceta Oficial (No. 53, del 21 de noviembre del 2012) published a new Law on Taxation, that had been approved earlier on July 23 and October 31.The basic outline of the law was approved by the Congress of the Communist party in April of 2011 and then by the National Assembly in 2012.

The complete gaceta version is not yet available “On Line”  though a published version has been distributed within Cuba. A description of the law has been presented in Granma here: Ley del Sistema Tributario   and Granma, 21 de Noviembre de 2012, Ley del Sistema Tributario. The introduction of the Granma article is presented below.

An analysis of the implications of the new taxation system must await the availability of the detailed text from the Gaceta Oficial.

Part of the Older Taxation System

Ley del Sistema Tributario
Instrumento decisivo en el camino de la actualización

Ivette Fernández Sosa

La política fiscal cubana deberá contribuir al incremento sostenido de la eficiencia de la economía y de los ingresos al Presupuesto del Estado con el propósito de respaldar el gasto público en los niveles planificados y mantener un adecuado equilibrio financiero, tomando en cuenta las particularidades de nuestro modelo económico. Así se consigna en el Lineamiento 56 de la Política Económica y Social del Partido y la Revolución, aprobado en el Sexto Congreso del Partido, y que a su vez, da paso a otras directrices que deberán desempeñar un papel determinante en la búsqueda de un proyecto social más justo y sostenible.

La ley servirá de acicate para el desenvolvimiento de las esferas y actividades impulsoras del desarrollo socio-económico del país

El Parlamento cubano aprobó la Ley No. 113, del 23 de julio del 2012, del Sistema tributario que acompañada de su Reglamento, el Decreto No. 308, del 31 de octubre del 2012, de las normas generales y los procedimientos tributarios, se publicó hoy en la Gaceta Oficial Ordinaria No. 53, del 21 de noviembre del 2012, de la República de Cuba.

Al aprobar este nuevo instrumento jurídico —cuya aplicación se ha previsto de forma paulatina a partir de enero del 2013—, quedarán derogadas la Ley 73 de 1994, el Decreto-Ley 169 de 1997 y cerca de otras 200 regulaciones emitidas por el Ministerio de Finanzas y Precios para normar la actividad tributaria en el país.

En su intervención en la Sesión Plenaria de la Asamblea Nacional del Poder Popular celebrada el pasado julio, el vicepresidente del Consejo de Ministros, Marino Murillo Jorge, identificó al sistema tributario como una herramienta que contribuye a disminuir las desigualdades entre los ciudadanos dada su capacidad de redistribución de los ingresos.

En su aplicación se tiene en cuenta la capacidad económica de los sujetos obligados a su cumplimiento y las características de los territorios; estableciéndose mayores gravámenes para los ingresos más altos, esclareció.

La Ley establece las normas sobre el pago de impuestos, tasas y contribuciones al Presupuesto del Estado.

 

 

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Cuba economy czar says cooperatives by year-end

By PETER ORSI Associated Press; July 23, 2012

HAVANA (AP) — Cuba’s economy czar said Monday that plans are in place to begin an experimental phase of non-state cooperatives in sectors ranging from food services to transportation by the end of the year.

While cooperative farming has already begun, Cubans have been waiting for regulations allowing them to form worker-owned co-ops in other sectors. The pilot program announced by Marino Murillo in a session of Cuba’s parliament will include 222 cooperatives.

The creation of midsize cooperatives is a long-promised lynchpin of President Raul Castro’s economic reforms, and Cuba’s economy czar promised state support to jump-start the pilot program. Murillo said some will be converted state-run enterprises, and co-ops will be given preference over private single-owner businesses.

“For these cooperatives and the non-state entities, in the coming year $100 million is being budgeted which is the financing necessary so they can be assured production, because if we create them and there is no financing, they won’t work,” Murillo told lawmakers in one of the parliament’s twice-a-year sessions.

He also reiterated that Cuba must also make its state-run enterprises more efficient and productive, since they will continue to dominate.

“The most important part of our economy will be the socialist state enterprise,” Murillo said. “Don’t think that all of a sudden the private-sector workers will generate $40 billion, $50 billion in GDP.”

Castro’s five-year plan to overhaul the economy has already legalized the sale of homes and cars and swelled the ranks of private-sector entrepreneurs by a quarter-million since 2010. Nearly all are small mom-and-pop shops, however, the likes of restaurants, cell-phone repair shops and jewelers.

Cuba insists that the reforms are not are not a wholesale embrace of capitalism but rather an “updating” of the nation’s socialist model, and most key sectors will remain under government control.

Other than a statute on taxation, no new laws were announced Monday. Foreign journalists were not allowed access to the session of the National Assembly, but state television aired Murillo’s speech in the evening. For islanders wondering whether the assembly would take action on long-promised reform of travel restrictions, it was another disappointment.

Early this year, Parliament President Ricardo Alarcon said in an interview that a “radical and profound” change to the rules, which keep most Cubans from leaving the country, was imminent.

There has been no word since then about scrapping the much-loathed “tarjeta blanca,” or “white card,” which islanders must apply for to travel abroad. Speaking to parliament, Castro repeated that the government still intends to reform the migratory rules, but did not say when it might happen. “It has not been relegated. On the contrary,” Castro said. “We have continued working toward its gradual relaxation, taking into account the associated side-effects.”

The pace of Castro’s reforms has slowed this year with no blockbuster changes announced since December, leading many economists to question whether Cuba can meet its own targets for reducing bloated state payrolls by 1 million workers, and shifting 40 percent of the economy into non-state control.

Last week, the island’s burgeoning small business class was dealt a blow with the low-key announcement of new, stiff tariffs on imported goods. The entrepreneurs say that without access to wholesale markets, the only way they can supply their businesses is through “mules” who transit between Cuba and places such as Miami, Ecuador and Panama with their bags stuffed with food, spices, clothing, electronics, diapers and other items tough to come by on the island.

On Monday, Cuban state media published an article seeking to quiet what it called the “numerous comments and anxieties” about the new customs duties. It made no mention of the small businesses, however, and insisted that the measures were necessary because excess baggage is slowing down service at the airport, making it resemble a cargo terminal.

Murillo said Monday that Cuba is studying how to establish wholesale markets, but did not announce specific plans.

Economists say it’s clear that Castro’s changes are here to stay, but change is happening slowly and measures to stimulate the private sector come with other decisions throwing up obstacles in entrepreneurs’ paths. “It’s very confusing because they are really sending mixed signals,” said Sergio Diaz-Briquets, a Cuba analyst based in the Washington area.

Castro also reiterated that the government will not be pressured into hurrying. “On a national level and above all in the exterior, there has been no lack of appeals, not always well-intentioned, to accelerate the pace of transformation,” Castro said. “It is a matter of such scope upon which the country’s socialist and independent future depends, that there will never be space for the siren calls that call us to immediately dismantle socialism and impose so-called shock therapies on the people.”

Cuba celebrates Revolution Day on Thursday. The date is sometimes used to make major announcements, though less so in recent years since Castro replaced his older brother Fidel as president.

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Phil Peters: “A Viewer’s Guide to Cuba’s Economic Reform”

A comprehensive, concise and high quality study on Cuba’s economic reforms has just been published by Phil Peters, the Vice President of the Lexington Institute.  Peters is also the author of the Blog The Cuban Triangle: Havana-Miami-Washington events and arguments and their impact on Cuba.

The complete presentation is available here:  Phil Peters, A Viewers Guide to Cuba’s Economic Reform

TABLE OF CONTENTS

Introduction

A Tale of Two Speeches

Raul Gets Started

The Communist Party Blueprint for Economic Reform

A Viewer’s Guide, Sector by Sector

Small Entrepreneurs

Agriculture

Cutting Government Spending

Private Cooperatives

State Enterprises

Foreign Investment

Removing “Excessive Prohibitions”

Tax Policy

 Local Government

Credits for Business and Home Improvement

 Conclusion

APPENDICES

A Chronology of Reform

The Media and Reform

The Legalization of Residential Real Estate Sales

The Demographic Squeeze

Phil Peters, Lexington Institute

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“The Economist” on Taxes in Cuba: Get used to it

The Castros’ subjects get acquainted with that other sure thing

Sep 17th 2011 | HAVANA | from the print edition

Half your monies are belong to us

WHEN Raúl Castro, Cuba’s president, announced last year that the government would cut its payroll by up to 20% and promote self-employment, state media hailed the birth of a “tax culture”. As most Cubans had never paid income tax, the Communist newspaper published a guide to the concept. Government economists predicted a 400% increase in tax revenue from individuals.

The experiment has been bumpy. Last October Cuba published a tax code for workers in its 181 newly authorised occupations, ranging from furniture repairer to professional clown. As in the early 1990s, the last time Cuba tried economic liberalisation and taxation, the rates were punitive: 10% on turnover, 25% for social security and up to 50% on income. Such levies discouraged some people from risking self-employment. By May applications for job licences were tailing off.

Moreover, Mr Castro failed to beef up the National Tax Administration Office (ONAT), which was soon overwhelmed by filings. That has delayed revenue collection, and allowed both intentional and inadvertent tax cheats to go unpunished. “They seem even more confused about this than we are,” says Ernesto, an engineer who obtained a licence to set up a plumbing business in March. He admits that he simply guesses how much he has earned each month and declares a tenth as much.

But Mr Castro seems more flexible than his brother and predecessor Fidel, who blamed the self-employed for sowing inequality and happily taxed private firms out of existence. Eager to find jobs for up to 1m public workers he plans to fire, he has carved out exemptions from the social-security tax and twice increased the scope for deductions. He has also ordered ONAT to retrain its staff and hire new inspectors. “There certainly is an element of making up the rules as they go along,” says one European diplomat based in Havana. “But Raúl seems totally determined to make this work.”

Further reforms are on the way. By the end of 2011, Cubans will be allowed to buy and sell homes and cars. It remains to be seen how long they will accept taxation without representation. “They happily take our taxes,” says Michel, a barber who recently founded a business. “But they still keep their secrets.”

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Cuba’s Economic Reform Process under President Raul Castro: Challenges, Strategic Actions and Prospective Performance

The Bildner Center at City University of New York Graduate Center organized a conference entitled “Cuba Futures: Past and Present” from March 31 to April 2. The very rich and interdisciplinary program can be found here: Cuba Futures Conference, Program.

I had the honor of making a presentation in the Opening Plenary Panel.  The Power Point presentation is available at “Cuba’s Economic Reform Process under President Raul Castro.”

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A Major Slow-Down for the Public Sector Layoff / Private Sector Job Creation Strategy

Raul Castro and the Council of Ministers, Granma, March 1, 2011

By Arch Ritter I had been looking in vain for any concrete information on public sector redundancies and the granting of self-employment licenses since December 2010.  After some searching in the Cuban press, the foreign press and various blogs, I came up empty handed. I was starting to think that the program had been aborted. Then yesterday, Raul announced in a publicized meeting of the Council of Ministers a major slow-down of the program, noting, in the words of the journalists, that “the up-dating of our model is not the work of a day or even a year but because of its complexity, it will require not less than a five year period to unfold its implementation” (Granma, 1 de Marzo de 2011) As far as I can determine, there have in fact been virtually no lay-offs yet in the public sector, although the original March 31 target for 500,000 fired workers is close at hand. Or at least, none have been clearly reported. The latest numbers for license-granting for the end of December 2010 indicated that some 75,000 new licenses had been issued with another 8,340 still in process – a slow start towards the March 1 target date. Granma, 7 de enero de 2011 The slow-down and delay in implementation is understandable.  Although the original proposal was in the right direction, it was seriously flawed and excessively hurried. The most obvious weakness of the strategy was that it called for lay-offs first, followed by or concurrently with job creation in the micro-enterprise sector which was only slightly liberalized in October 2010. As various critics quickly observed, this was placing the “cart before the horse”. The original time frame for the lay-off process – from July 20, 2010 to March 31, 2011 – became even more condensed as months of inactivity followed months. If implemented, this approach would have amounted to a draconian type of shock therapy. The process of firing workers is not easy under any circumstances. Though the Government stressed repeatedly that those made redundant would be supported by the state, the prospects of being laid off and having to establish one’s own micro-enterprise in a policy environment that is still difficult if not hostile must be unnerving for many people. It was to be implemented during the Cuban recession – (though Cuba is now appears to be in a process of recovery, due to higher nickel prices, increased tourism including US tourism, higher remittances.) Moreover, workers have no independent Unions to defend their rights during such a process of redundancies. (It was the Central de Trabajadores de Cuba that announced the lay-off strategy.) There was a potential for irregularities and perversions in the firing process as well, with redundancy being determined by factors such as Party faithfulness, personality issues,  or friendship with the relevant officials, rather than labor effectiveness, which is usually difficult to determine in any case. Moreover, the strategy, which was to be a defining component of economic reform and structural change, was adopted before the public discussions around the Proyecto de Lineamientos de la Política Económica y Social del Partido y la Revolución,” There had been no public input or discussion in the media or public forums before this strategywas sprung on the Cuban people. Furthermore, it was clear from the start that the liberalization of self-employment was insufficient for the necessary level of job creation. (See Perez and Vidal, Ritter and Mesa-Lago for example.) There are some measures that are supportive of micro-enterprise expansion. These include a small increase in the permitted range of activities, minor relaxation of regulations and a small modification of the tax regime. More significant and positive are the liberalization of licensing and the “de-stigmatization” of the self-employed by the media and politicians. However, a variety of policies continues to constrain the activities of micro-enterprises and will prevent it from expanding as envisioned by the Government: –        Exceedingly onerous taxation continues. –        The tax on hiring workers will discourage job creation. –        A narrow definition of legal activities will limit enterprise and job creation. –        Exclusion of virtually all high-tech and professional activities blocks development of knowledge-intensive enterprises and wastes the training of the highly educated. –        Bizarre restrictions remain (such as a 20 chair limit on restaurant chairs). –        Restrictions and prohibitions on hiring workers remain. –        Taxes and regulations result in the stunting of enterprises which prolong inefficiencies and promote the underground economy. –        Unreasonable restrictions and heavy taxes breed contempt and non-compliance for the law. Under these circumstances, the necessary expansion of Small Enterprise will be slow and in fact probably would not occur. In this case, the Government will have two basic choices: either it can abort the structural change process or it can further liberalize the micro-enterprise sector in order to permit it to generate jobs for redundant state workers. In order to establish an “enabling environment” for micro-enterprise, here are some of the types of policy modification that would be necessary:

  1. Modify the tax regime: Eliminate the tax on hiring workers and permit all costs to be deductible from gross revenues for calculating taxable income;
  2. Broaden of permitted activities, including professional and high-tech activities;
  3. Relax vexatious regulations;
  4. Liberalize hiring restrictions;
  5. Establish microcredit institutions (international assistance is available for this)
  6. Improve access to wholesale input purchase – not done yet;
  7. Legalize “intermediaries” (permitting specialization between producers and venders)
  8. Permit Advertising
  9. Establish a “Ministry for Small Enterprise”!!!

 

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Micro-enterprise Tax Reform, 2010: The Right Direction but Still Onerous and Stultifying

By Arch Ritter

As part of the policy reforms designed to absorb almost 1.2 million redundant state sector workers into the private sector, the Government of Cuba has modified the micro-enterprise tax regimen. Some of the modifications were positive in the sense that they will reduce the heavy tax burden on self-employment. However, the changes are modest, and the tax system will continue to limit job-creation and the expansion of micro-enterprise.

Bicitaxis, Central Havana

I. The New Tax Regime

The new taxation system, presented in the Gaceta Oficial, número 11, and Gaceta Oficial, número 12 on October 1 and 8, 2010, has five components:

1.      Sales Tax on Goods

2.      Tax on Hiring of Workers

3.      Income Tax

4.      Surtax on Services

5.      Social Security or Social insurance Payments

Taxes generally will now be payable in Moneda Nacional or “old” pesos. For purposes of tax payment, taxes owing in convertible pesos (CUCs) are to be exchanged into Moneda Nacional at the going quasi-official rate (around 22 to 26 “old” pesos per convertible peso, over the 2001-2010 period). There is a special regimen for bed-and-breakfast operations that is not considered here.

1. Sales Tax

This is a 10% tax levied on the value of sales of goods and payable by all micro-enterprises that do not qualify for the Simplified Tax Regime (See 3. below.)  While this tax in principle is reasonable and is used in most countries, the administrative cost of monitoring the value of sales and collecting the tax for the many of the smaller self-employed activities will be high.

2. Tax on the “Utilization of Labor”

This tax on the hiring of employees is set at “25% of 150%” (that is, 37.5%) of the average national wage which was 429 pesos per month in 2009 (ONE, AEC Table 7.4). The tax would thus be about 161pesos per month per employee or 1,932 pesos per year.

A “Minimum” requirement for the hiring of employees for tax determination purposes is set at two employees for paladares and one for other food vendors and a few other activities. There appears to be no exception or adjustment of the tax for part-time employees.

(Note that some 74 self-employment activities are prohibited from hiring employees and another 7 can hire one employee only.)

3. The Income Tax

There are two tax income regimes, a simplified regime for lesser self-employment activities and a more complex regime for larger activities.

The Simplified Tax Regime applies to some 91 activities. In place of the income tax, sales tax, tax on public services, they instead pay a consolidated tax, constituted by the monthly licensing fee which ranges from 40 to 150 pesos per month, payable in the first ten days of each month. (It is unclear whether overpayments would be refunded – they were not under the previous system.)

Other enterprises fall under the general tax regime, and pay all of the individual taxes discussed here. These activities pay the up-front monthly tax/license ranging from 40 to 700 pesos per month.

For the determination of the tax payment, the “tax base” is defined as total revenue less a fixed amount for deductible expenses. The maximum amounts allowed for deductible expenses range from 10% for 10 activities, 20% for room rental operations, 25% for 40 activities, 30% for 10 activities and 40% for 6 food and transport activities. (Bed and breakfast operations have their own specific regimen.)

The income tax rates rise progressively from 0% for the first 5,000 pesos, through 25% for additional income between 5,000 and 10,000, 30% for income increments from 10,000 to 20,000, 30% for 20,000 to 30,000, 40% for 30,000 to 50,000 and 50% for additional income exceeding 50,000.00 pesos. This rate is high but not unreasonable in international comparison.

4. Sales Tax on Services

A 10% additional sales tax is levied on services provided by micro-enterprise. Those enterprises qualifying for the Simplified Tax Regime are exempt from this tax.

5. Social Security Payments

These payments are destined ultimately for old age support, maternity leave, disability and death in the family. They are determined according to a scale that the self-employed worker selects, and may range from 25% of 350 to 2000 pesos per month depending on the choice of the self-employed person. This is a social insurance scheme though the payments are similar to taxes.

II. Evaluation of New Tax Arrangement

This new tax regime represents a minor improvement over the previous regime. The main improvement is that it permits the deduction as costs of production of more than a maximum of 10% of total revenues as was the case previously. This is a reasonable adjustment to the tax base as most of the self-employed activities generate costs that are higher than the maximum allowable 10% of total revenues.  This is especially beneficial for activities such as gastronomic, transport and handy-craft or artisan activities for which input costs are far beyond 10% of total revenues.

The progressive structuring of the income tax regime is reasonable though stiff.

However there are a number of flaws in the taxation regimen which will continue to stunt the development of small enterprise and will prevent the absorption of the redundant workers being displaced from the public sector.

1. The Blocking of Job-Creation

First, the tax on employment is problematic as it adds to the employer’s cost of hiring a worker. The obvious impact of this tax will be to limit hiring and job creation. Or employment will be “under the table”, unrecorded, and out of sight of officialdom.

2. Onerous Overall Tax Levels

The overall tax level is punitive. The sum of the income tax, employee hiring tax, and public service surtax is high- and as noted below can help create effective tax rates exceeding 100%, as is explained on Section III. This will continue to promote non-compliance. It will discourage underground enterprises from becoming legal. The establishment of new enterprises will be discouraged.

3. Erroneous and Unrealistic Base for the Income Tax

The most serious shortcoming of the income tax regime involves the tax base which is not “net revenues” after the deduction of input costs, but an arbitrary proportion of total revenues.

The tax regime limits the maximum for input costs deductible from total revenues to 10 to 40% depending on the type of enterprise involved. When the actual micro-enterprise input costs exceed the maximum allowable, the tax rate on true net income can become very high. In the example below, the effective tax rate (defined as the taxes payable as a percentage of true net income) can exceed 100%. Obviously this would kill the enterprise and promote cheating and non-compliance. It will discourage underground economic activities from becoming legal and block the establishment of new enterprises.

4. Continued Discrimination versus Cuban Enterprise in Favor of Foreign Enterprise

The minor reforms of the micro-enterprise tax regime do relatively little to reduce the fiscal discrimination favoring foreign enterprise. (See Table 1.) The main difference is the determination of the effective tax base which is total revenues minus costs of production for foreign firms but for micro-enterprise is gross revenue minus an arbitrary and limited allowable level of input costs. The result of this is that the effective tax rates for foreign enterprises are reasonable but can be unreasonable for Cuban microenterprises. For Cuban micro-enterprises, the effective tax rate could reach and exceed 100%.

Moreover, investment costs are deductible from future income streams for foreign firms this being the normal international convention. But on the other hand, for Cuban micro-enterprise, investment costs are deductible only within the 10 to 40% allowable cost deduction levels.

III. Example: Three Taxation Cases for a Paladar or Restaurant

To illustrate the character of the tax regime, a case of a “Paladar” is examined below. It is assumed that the total revenues or gross earnings of the Paladar are 100,000 pesos per year (Row 1) or a modest 280 CUP or about $US 10.50 per day.

It is imagined then that there are three costs of production cases: Case A, B and C where costs of production are 40%, 60 and 80% of total revenues respectively. A situation where input costs for a Paladar are 80% of total revenues is reasonable, given the required purchases of food, labor, capital expenses, rent, public utilities etc. On the other hand, the 40% maximum is unreasonably low.

The differing true input cost situations (Rows 2 and 3) generate different true net income (Row 6). The tax base however is determined by the legal maximum allowable of 40,000 (Row 4 and 5) and is 60,000 pesos in all three cases (Row 7). The income tax payable is determined by the progressively cascading scale noted above and is 19,750 in all three cases (Row 8, based on calculations not shown here). The tax on hiring the legal minimum two employees is 25% of 150% (that is, 37.5%) of the average national wage which was 429 pesos per month or 161 pesos for 12 months for two employees = 3,864 pesos per year (Row 9). A guess for the surtax on use of public services is 1,200 pesos per year (Row 10). The total taxes then are the sum of Rows 8 t0 10 and are 26,614 per year (Row 11).

The effective tax rate is then calculated as Tax Payment as a percentage of Actual Net Income (Row 11 divided by Row 6). For the third case where true costs of production are 80% of total revenues, the effective tax rate turns out to be well over 100% (124.1%). This is due to fixing the maximum allowable for costs in determining taxable income at an unrealistic 40% while the true costs of production were 80% of total revenues.

The chief result of this example is that effective tax rates can be much higher than the nominal tax rates for all the activities where true input costs exceed the defined maximum. In some cases, taxes owed could easily exceed authentic net income – assuming full tax compliance.  This situation likely occurs for all activities not covered by the simplified tax regime.

Such high effective rates of taxation of course could destroy the relevant microenterprise, and block the emergence of new enterprises. While under the previous policy environment for microenterprise, this was perhaps the objective of policy. However, the objective of the new policy environment is to foster and enable micro-enterprise and to create jobs.

IV. Conclusion

Can the Micro-enterprise sector generate about 500,000 new jobs by April 2011 and 1.2 million in the next year? On the positive side, there have been some measures of a non-tax nature (e.g. the stigmatization has been relaxed, licensing has been liberalized; there has been a minor increase in legal activities; prohibitions and regulations have been eased somewhat; and improved access to inputs will likely be possible.) But on the negative side, a narrow definition of legal activities will limit enterprise and job creation; the prohibition of professional activities remains; restrictions and prohibitions on hiring workers remain; and restrictions and prohibitions remain.

The timid revisions of the tax regimen will not facilitate job creation in the microenterprise sector.

  • The high level of taxes generally will limit enterprise creation and legalization.
  • The underground economy will continue to be encouraged.
  • The tax on the hiring of employees will discourage the absorption of labor into microenterprise activity.
  • Microenterprises will remain stunted by the high effective tax rates that are incurred when costs of production exceed the minimum deductible for tax determination purposes.
  • The tax discrimination favoring foreign firms in joint ventures continues.

In order for the micro-enterprise sector is to expand so as to absorb the 1.2 million redundant public sector workers in the process of being fired, further reform of the tax system is necessary.

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The New Analysis of Cuba’s Monetary Situation by Pavel Vidal Alejandro: “Cuban Monetary and Financial Jigsaw Puzzle”

An insightful new analysis of Cuba’s monetary, exchange rate, banking and balance of payments imbroglio by Pavel Vidal Alehjandro has just been published by the Real Instituto Elcano, Madrid. A bruef extract is included below.

The full document is available here: The Cuban Monetary and Financial Jigsaw Puzzle

Theme: The 2008-09 balance of payments crisis and a succession of errors in economic policies have resulted in new monetary and financial complications in the Cuban economy, to be added to the costs and distortions of currency duality.

Summary: The Cuban economy currently operates with two local currencies –the Cuban peso and the convertible peso, both with convertibility problems and multiple and overvalued exchange rates– and has been subject to a banking crisis since 2009. It is a veritable monetary and financial jigsaw puzzle. In order to do away with the dual currency and overcome financial imbalances, monetary policy must devalue the two domestic currencies. Cuba’s banks are facing a systemic liquidity crisis with no lender of last resort to help them out of it. The country cannot access a last-resort loan from the IMF, the World Bank or the IDB since it is not a member of these institutions. The government has been applying a tough adjustment policy which has led to the reduction in the fiscal deficit and to a surplus in the balance of payments, which has served to pay off debt and gradually unfreeze bank accounts, although the matter is far from being fully settled

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New Essay by Pavel Vidal and Omar Everleny Perez on Fiscal Adjustment, Structural Change and Self-Employment

An essay entitled “Entre el ajuste fiscal y los cambios estructurales: se extiende el cuentapropismo en Cuba”
by Pavel Vidal Alejandro y Omar Everleny Pérez Villanueva of the Centro de Estudios sobre la Economia Cubana has just been published in the Digital Supplement of Espacio Laical,   the CONSEJO ARQUIDIOCESANO DE LAICOS DE LA HABANA, Suplemento Digital No.112 / Octubre 2010.

Here is the web address for the article:

( “Entre el ajuste fiscal y los cambios estructurales: se extiende el cuentapropismo en Cuba” . )

The web address for Espacio Laical is

Espacio Laical: http://espaciolaical.org. (Then if necessary go to the October 2010 edition first page.)

This essay is well worth reading, outlining the general economic situation in Cuba provoking the September 2010 liberalization of the restrictions on self-employment, summarize the regulatory changes, and present a number of comments on the policy changes, summarized below in Spanish:

1. Una gran parte de la población y especialistas coincide que la lista publicada en Granma de 178 actividades es aún demasiado precaria
y reducida para poder asimilar el medio millón de desempleados estatales. Son necesarias nuevas categorías y agilizar la creación de
las cooperativas no agrícolas.

2. Las categorías son demasiado específicas y ello frena la iniciativa individual. Sería preferible una lista de categorías generales que le
dieran espacio a los cuentapropistas y microempresarios para proponer y perfilar una oferta de bienes y servicios diversa. Esta tiene queser lo suficientemente flexible como para poder adecuarse a una demanda cambiante en el tiempo y heterogénea en lo local, y que es indescifrable para cualquiera que se lo proponga centralmente.

3. Las actividades permitidas son poco intensivas en conocimiento y no permiten aprovechar la inversión en educación que ha hecho el
país por décadas. Muchos de los desempleados estatales serán graduados universitarios que necesitarán una opción acorde con su
calificación.

4. Se permite el crédito bancario, pero el sistema financiero tiene problemas de liquidez, y habría que ver cuánto del ahorro todavía está comprometido en los créditos que se dieron para la sustitución de equipos electrodomésticos dentro de la llamada Revolución
Energética. Como alternativa, se requiere agilizar y promover la colaboración internacional en el tema del microcrédito.

5. No se va a crear un mercado mayorista de insumos para las PYME´s. Hoy los mercados de insumos para las empresas estatales sufren de desabastecimiento como consecuencia de los problemas económicos y financieros del país. Por tanto, es muy difícil pensar por ahora en un apoyo estatal en este aspecto. Pero si se promueve el microcrédito con colaboración internacional, ello significaría una entrada de divisas al país que posibilitarían abrir la importación para los cuentapropistas, microempresarios y cooperativistas. En Cuba operan suficientes proveedores extranjeros que podrían abastecer un mercado de insumos para las PYME´s. Los mismos mercados mayoristas que hoy existen para las empresas estatales podrían darle entrada a las PYME´s. La doble moneda no es un problema para las PYME´s pues tiene abierta la convertibilidad del peso cubano y el peso convertible en las casas de cambio (CADECA).

6. La medida considera pocos incentivos a la legalidad. Algunas actividades, por su naturaleza, son más visibles y tendrán por obligación ue legalizarse y pagar impuestos. Pero hay otras que tienen como único incentivo la incorporación a la Seguridad Social.
Evidentemente, para los que ya reciben una jubilación, este no tiene ningún efecto. El microcrédito y el mercado de insumos, precisamente serían incentivos a la legalidad, pues se necesitaría estar registrado y pagar impuestos para acceder a ellos. Las PYME´s internacionalmente son apoyadas tributaria e  institucionalmente. La asesoría legal, económica, informativa y otras ayudas promoverían la legalidad y el desarrollo de las mismas.

7. Falta acompañar estos cambios con leyes que creen confianza para la inversión de esfuerzos y dinero en emprendimientos privados, y que garanticen, tanto al Estado como a los ciudadanos, el cumplimiento de derechos y deberes.

8. El estancamiento económico que vive el país es otro de los obstáculos para la creación de nuevas PYME´s. La oferta de bienes y servicios de los cuentapropistas, las microempresas y las cooperativas necesita de una demanda. Con estancamiento económico y aumento del desempleo es muy difícil pensar en una demanda suficiente desde las familias o desde las empresas estatales. Una gran parte de la demanda ya hoy está cubierta con una oferta desde la ilegalidad

Omar Everleny Perez and Pavel Vidal

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Raul Castro and Policy towards Self-Employment: Promising Apertura or False Start?

In his speech before the National Assembly on August 2, 2010, President Raul Castro stated that the Council of Ministers had agreed to expand self-employment by eliminating various prohibitions in the granting of licenses and on some types of goods and services. and by making the employment of workers in such enterprises more flexible. At the same time, he referred to a strengthening of taxation on such enterprises.

If the policy environment is indeed liberalized, it will be a great thing for the Cuban economy and for people’s material levels of living. However, the reference to strengthened taxation is worrisome.

Advantages of an Apertura for Small Enterprise

What might be the impacts of the liberalization of self-employment as well as small enterprise (to five or ten employees)? Here is a quick listing of the benefits:

  • An increase in small enterprise would Increase competition, lower prices, improve quality and broaden diversity of the goods and services produced.
  • Productive employment  would be created
  • Incomes would be generated.
  • The average levels of incomes would be lowered in the small enterprise sector if it were opened up for free entry by anyone wanting to enter the area
  • Citizens would gain when reduced effort and time was necessary to obtain the goods and services necessary for survival.
  • Improved productivity of small enterprises would permit higher material well-being throughout Cuban society.
  • The massive underground economy would shrink.
  • Tax revenues from the sector would increase as it expanded .
  • Foreign exchange earnings and savings would occur as domestic products replaced imported products and as markets for tourists and for export expanded.
  • Innovation and Improvement would be promoted.
  • Urban and rural commercial revival would occur.
  • Improved general quality of life.
  • The culture of compliance and respect for public policy rather than regulation avoidance and illegality would in time take effect.

If one doubts the advantages of small enterprise liberalization, consider the arts and handicrafts sector. Before these areas were liberalized in 1993, the souvenirs and craft products available for purchase by tourists or Cuban citizens were of abysmal quality and without diversity, coming as they did from a number of state workshops. However, following liberalization, this area sprang to life. Very quickly the Place de la Catedral and Avenida “G” (de los Presidentes) were filled with vendors providing a rapidly widening range of crafts and arts. Very soon there were too many vendors for these locales and they were relocated to the Malecn, La Rampa, and the park between Avenida del Puerto and the Cathedral. They now constitute a major tourist attraction and earn significant amounts of foreign exchange for Cuba.

The apertura for the arts and crafts liberated the creativity, innovativeness, entrepreneurship and energies of Cuban citizens who quickly seized the opportunities available. They earn a living for themselves and make a valuable contribution to Cuban society. An apertura in all areas of the economy to small entrepreneurship would make similar contributions.

Art Market, Plaza de la Catedral, 1994

Market Stall for Sculpture, Malecon, circa 2002

 

Disadvantages of an Apertura for Small Enterprise

There are always disadvantages as well as advantages – costs as well as benefits – in economics and in the evaluation of public policy. However, I have trouble finding any disadvantages or costs in a liberalized policy environment for small enterprise.

There are three concerns, however.

First, would such an aperture worsen income distribution? In time, as some small enterprises increased in size, this would indeed likely occur. However, Cuba already has an income tax and system for taxing small enterprise so that this effect could be managed. But opening self-employment and small enterprise up to all possible entrants would also increase competition in the sector and push prices and thence incomes towards average levels.

Second, would an aperture encourage pilferage of inputs from the state sector – as has happened in the past? This is a possibility that has to be managed. It can be managed by establishing a market for inputs for the sector that is reasonable and fair. At present, it is difficult for small enterprises to obtain their necessary inputs – except at the Tiendas para la recaudacion de Divisas (TRDs) or (former) dollar stores – leading to purchases of inputs that have found their way out of the state sector. A reasonable market for the provision of inputs to the sector is thus vital.

Third, would an aperture lead to an expansion of “infractions” and illegalities as small enterprises tried to evade rules and taxes? This could indeed occur if regulations remained asinine and if tax burdens were impossible.  However, if an aperture to small enterprise were accompanied by the dropping of silly regulations and controls, and if the tax regime was made reasonable and fair, it is likely that compliance would improve. However, building a culture of respect for regulations and taxes will also take some time as the self-employed have come to view government as an enemy force imposing rules and regulations that are aimed not just at their containment  but also their elimination.

Current Policy towards Self-Employment

The current policy environment within which the self-employed operate is particularly difficult.

There are a variety of controls and prohibitions that seem designed to obstruct, contain and eliminate the “Cuenta-Propistas”. Here is a summary of the policy environment:

Controls and Prohibitions:

1. All activities are prohibited except those specifically permitted

  • All professional self-employment is prohibited
  • Of the initial 156 legalized activities 41 were prohibited in around 2005

2. The number of the self-employed is strictly controlled through the granting of licenses (See Chart 1.)

3. Taxation is onerous and indeed is much heavier than that facing foreign multi-national corporations in joint ventures. This is  a shocking type of discrimination against Cuban citizens (See Chart 2.)

4. There are numerous prohibitions

  • No access to credit;
  • No access to foreign exchange or imports (except through state “TRD” stores)
  • No advertising
  • No intermediaries
  • Limits on numbers of employees;

5. There are innumerable petty restrictions (See Chart 3.)

6. The political and media environment has been negative since 1995.

For these reasons, the self-employment sector has stagnated over the last 10 years following the initial expansion of 1993-1994 following its initial liberalization (See Chart 4.)

Possible Policies towards a Small-Enterprise Apertura

If President Raul Castro wished or was able to provide a definitive aperture for small enterprise, here are the types of policies that would be under consideration.

1. Liberalize Licensing: Let anyone and everyone open a small enterprise (  Result: competition will push prices downwards and quality upwards;

2. Permit All Types of Self-Employment, including Professional and High-Tech while maintaining state medicine and health systems intact;

3. Raise the limit on employees to 5, 10 or 20;

4. Provide legal sources for the purchase of Inputs;

5. Permit Access to Imported Inputs (outside TRDs and at the exchange rater available for the state sector);

6. Eliminate silly and vexations restrictions;

7. Make Microenterprise Taxation Simpler and Fairer;

8. Establish Micro-Credit Institutions;

9. Establish a Ministry for the Promotion of Small Enterprise.

However, needless to say, former President Fidel Castro undoubtedly would disapprove of any aperture judging from (a) the Initial near shut-down of small enterprise during the 1968 Revolutionary Offensive; (b). the further tightening of the prohibition on self employment during the “Rectification Program” of 1986-1990; and (c) His statement lamenting the 1993 opening to Self-employment in 1995.

On the other hand, Raul Castro has displayed a streak of pragmatism that seems to be lacking in his elder brother, witness his initiative in re- opening the farmer’s markets in 1994.  Moreover, his reputation is more for talking quietly and eventually acting rather than talking with grandiosity and making false starts. Time will tell.

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