Tax Time in Cuba

Fernando Ravsberg

HAVANA TIMES, Jan 17 — Hundreds of thousands of Cubans will begin filling out tax returns, a new activity for citizens who have lived half a century without paying taxes in a country where even today the majority of the population is exempt.

Among the changes planned by Raul Castro is the enactment of a tax law similar to the ones that exist in the rest of the world. However, this is a delicate social issue that is advancing slowly – sometimes even backwards.

Self-employed workers are paying taxes, but these were reduced for various trades. Meanwhile state employees continue to be exempt, although the new law envisages a surcharge on wages.

Economist Omar Everleny Perez, director of the Center for the Study of the Cuban Economy, explained what constitutes the tax policy in Cuba and how the country is moving towards a much more encompassing law.

A delicate issue

Discussion around the new law, which will now be debated in Parliament in mid-2012, “was postponed because of complicated aspects that needed study, such as paying property taxes, which in other countries may be normal but Cubans aren’t used to it,” explained the professor.

The vast majority of Cuban citizens don’t pay taxes on their salaries, but Perez made it clear that “while the current law doesn’t exonerate them; it effectively doesn’t apply to them either, because the average wage is still very low. Although those earning more than 1,000 national pesos ($45 USD) a month, are already having 5 percent tax deducted from their pay checks.”

The average Cuban salary is $17 per month (USD), well below the cost of living, estimated at $80 USD. Moreover, the economic model made taxation unnecessary because the government owned all the companies; therefore, they paid into the treasury directly.

Things have changed with the growth of the independent sector. In 2011, tax revenues soared as the numbers of self-employed shot from 140,000 to almost 360,000. However, revenues from the surcharge on tobacco and alcohol continue to exceed those rates.

Greater flexibility in taxing

According to Omar Everleny Perez, “They are attempting to harmonize the development of self-employment activities with the implementation of a tax policy. The two go hand in hand, because if the only goal were to collect taxes, that would only end up destroying the businesses that start up.”

In 2011 some fiscal policies were relaxed: surcharges on some activities were reduced, employees who had up to five employees were made exempt (in addition to those who earned less than 10,000 national pesos ($400 USD) per year), and social security payments received by self-employed workers was excluded from their taxable income.

Perez tells us that private labor activity is progressing well. “The net growth in the number of self-employed is continuing, and the closure rate of those businesses that have opened is only 25 percent – which is a pretty good rate.”

Nevertheless, university economists propose to establish greater incentives, such as “grace period on taxes during the first five months after a business start-up, giving them a period for the operation to mature, first letting it generate resources and then having it make payments.”

Self-employed workers

Omar Everleny Perez maintains that taxes aren’t high in Cuba, and some people who work in highly profitable sectors agree. However, those engaged in lower-paid activities are struggling to meet their obligations.

Taxi driver Hector Torres believes that “as long as they provide us the facilities for working, then taxes are fine; they exist in almost every country in the world.” Such drivers pay $50 USD a month in taxes, but earn 15 USD per day due to the limitations of the public transport system and thanks to the black market, where they can buy fuel at a third of its market price.

Nonetheless, the situation is seen very differently by Felix Rivas, the owner of a small cafe. He holds that tax policy isn’t fair. He complains that everyone pays the same amount, and therefore argues, “The tax should be according to the location and the sales of each business.”

Frank Alfonso, a ceramist, also believes that “taxes should be lowered, but they should also serve for each municipality to create its infrastructure.” He sells in an open-air space leased from the municipality where there’s not even a restroom for his workers.

Objectives for 2012

Omar E. Perez holds that if the policy is one of equal treatment for the state and the non-state sectors, they will have to re-structure some of the tax rates. “[In the months] when there’s a decline in tourism you can’t collect the same amount of taxes on individuals who rent out rooms in their houses.”

The economist expects that “this year’s highly skilled workforce — software producers, engineers, architects, professionals — might also begin engaging in non-government work; what’s brewing is the idea of realizing this through cooperatives.”

Nevertheless, beyond the social impact of paying income tax “what’s clear is that we need to make taxpayers out of the large enterprises, oil and tourism. Because they are the ones that should make the main contributions to the government treasury,” said Perez.
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An authorized translation by Havana Times from the Spanish original published by Cartas Desde Cuba.