Cuba gives details on new tax system

[El Presidente]

The Associated Press October 22, 2010, 10:55AM ET

http://www.businessweek.com/ap/financialnews/D9J0QBH80.htm

Cuba gives details on new tax system

HAVANA

Cuba has laid out details of a sweeping tax system for the newly self-employed -- a crucial step in the socialist state's plan to convert hundreds of thousands of state workers into self-employed businesspeople.

The tax code described in a two-page spread in the Communist Party newspaper Granma will have many Cubans paying more than a third of their income to the state, while those who create businesses and hire their own employees will pay more.

Cuba announced last month that it was laying off half a million state workers -- nearly 10 percent of the island's work force -- while opening up more avenues for self employment.

At times, the article reads like a children's lesson for a population with little experience at entrepreneurship -- and almost none with the concept of taxes. It also offers a detailed peek at a mix of levies that would be complicated even for an accountant.

Throughout, there is an attempt to soften the blow by explaining that no government can provide services without revenue.

"Perhaps because Cubans are used to receiving medical care without taking a penny out of our pocket, or studying for free at any educational center we want, few stop to ask where the money the state uses for this comes from," the article reads.

Those selling goods and services will pay a 10 percent income tax monthly, as well as another 25 percent into a social security account, from which they will eventually draw a pension.

Those who hire employees also will also have to pay a 25 percent payroll tax. The article says taxes will rise for successful businesses with many employees, but does not give details.

"The tax has a regulatory character in order to avoid a concentration of wealth or the indiscriminate use of the labor force," the article says. "The more people hired, the higher the tax burden."

Anyone making more than 50,000 Cuban pesos ($2,400) a year will have to open a bank account and keep detailed books -- perhaps creating a market for the private accountants who will be allowed under the economic reforms. Those who earn less need only maintain a list of income and costs. Most Cuban state workers make about $20 a month.

The article says people in some forms of self-employment will be exempt from the 10 percent tax and instead will pay a fixed amount each month, regardless of what they make. It does not say which jobs will be eligible for this approach, however, nor say how much tax workers will pay. These workers will also be obligated to pay the social security tax.

The reforms are an effort to breathe life into a dormant socialist economy that can no longer afford to provide free or nearly free health care, education and basic food to its population. They are the most significant adopted by the communist government since at least the early 1990s.

The new system borrows many aspects of capitalism, while keeping in place Cuba's state-dominated control of the economy. Citizens will be allowed to apply for licenses to work for themselves in just 178 areas, from car maintenance to rabbit farming, accounting to circus clown.

[CBL]

Does this mean that any Cuban can start their own brand of cigars now? Will be interesting to see what kind of businesses will open up in Cuba now. When I was in Havanna I spoke to a lot of people who wanted nothing more than to be their own boss, wonder if this new tax system will kill any of those dreams....

[sblevit]

"The article says taxes will rise for successful businesses with many employees"

Sounds like Castro is taking a page from the Obama book on taxation.

Is it really that hard to understand that it's more economically beneficial to provide incentives for creating jobs and not disincentives for having done so?

PS: I'll be applying for the circus clown license as soon as the embargo is lifted.

[CanuckSARTech]

Does this mean that any Cuban can start their own brand of cigars now? Will be interesting to see what kind of businesses will open up in Cuba now. When I was in Havanna I spoke to a lot of people who wanted nothing more than to be their own boss, wonder if this new tax system will kill any of those dreams....

I don't think "cigar torcedore" is one of the 178 allowed jobs. Besides, Cuba and H S.A. has enough of a problem dealing with knock-offs as it is.

Fingers crossed that the Cuban people can pull this experiment off - I'd hate to see their economy go into any more of a shock.

[Colt45]

Besides, Cuba and H S.A. has enough of a problem dealing with knock-offs as it is.

Why should HSA and the government have a monopoly on the production of Cuban cigars? Personally, I look forward to the day

when there will be competition and choices other than Habanos products.

[CanuckSARTech]

Why should HSA and the government have a monopoly on the production of Cuban cigars? Personally, I look forward to the day

when there will be competition and choices other than Habanos products.

I'm not necessarily in favour of the HSA monopoly as you state, Colt. I agree that we need to see some changes and better choices.

But, I just don't think that allowing it to roll out as a "legitimate" job for the private citizenry is the correct way to do it. Before you know it, you'll have 10,000 different "Cuban" marcas out there, with everyone privately rolling their own. As it currently stands, it can be a nightmare for Habanos consumers to be able to tell what's authentic and what's not on the world market. To allow a home roller to legally band and sell their own would just lead to an over-abundance on the world market, and then potentially a downfall of quality and consistency again.

I agree that there should be come competition and choices. So, maybe if they grant licences to a select number of their best rollers, and/or master blenders, to be able to do so privately under a number of separate privately-owned brands. That might be the best way.

But to give that option to potentially 10% of the country's workforce could be disaster for the cigar-consuming world as a whole. My thoughts and impressions, anyways.

[Colt45]

But to give that option to potentially 10% of the country's workforce could be disaster for the cigar-consuming world as a whole.

I'm really not talking about people rolling cigars out of their houses etc. I'm talking real cigar people completely autonomous from the anchors of

the government and HSA, opening their own factories, having control over their own tobacco, their own distribution, etc.

Another smaller step which we've also discussed here is HSA leasing brands they have less interest in than their top lines. Again, an autonomous

entity that produces the cigars with no meddling, but in this scenario, HSA gets their cut.

But that aside, what if there were a bunch of small independent producers who were able to legitimately get their products on the world market?

Eventually, I expect the wheat would be separated from the chaff. Imagine being left with a number of, for lack of better term, "boutique" producers...

P.S. For those of us who enjoy beer and wine, would you rather drink a beer or wine produced by someone who truly cares about their product,

or someone who's main objective is to maximize profits?

[laficion]

what if there were a bunch of small independent producers who were able to legitimately get their products on the world market?

Eventually, I expect the wheat would be separated from the chaff. Imagine being left with a number of, for lack of better term, "boutique" producers...

Now there's something that would be interesting I'm for that, BUT,

Breaking up the state tobacco monopole and allowing small private growers to

handle their own production, distribution, marketing, would be imposible under today's regime.

It would have to be under HSA's general control but under the same lines as Tabacuba, Cubatobaco and others.

It could & would be adding something new to the tobacco industry.

Just my 2 Euros.

[Colt45]

Breaking up the state tobacco monopole and allowing small private growers to

handle their own production, distribution, marketing, would be imposible under today's regime.

Yeah Guy, I'm not expecting competition to open up tomorrow - for me it's just one of those topics for discussion. I also realize there are plenty

of people within the organization who do care about the product - they're the ones I'd love to see have a shot at doing it their way

[Leopolis Semper Fidelis]

The cigar industry in Cuba was humming along nicely until the Commies came and stuffed things up. They say one can't turn back the clock...and it would be difficult to do so in present circumstances. So much water has flowed under the bridge since 1959. But who knows? Just a pipe dream...

[El Presidente]

The cigar industry in Cuba was humming along nicely until the Commies came and stuffed things up.

Not quite

Major companies had already come in and purchased many of the factories and were producing some rather cheap and ghastly cigars just before the time of nationalization.

The "Golden period" was before the 1950's when there was an abundance of individual owners (as opposed to corporates) produced cigars.

[CanuckSARTech]

Another smaller step which we've also discussed here is HSA leasing brands they have less interest in than their top lines. Again, an autonomous

entity that produces the cigars with no meddling, but in this scenario, HSA gets their cut.

Gawd, I would be such a proponet for this. To have the Connies and the Dips better realized? Along with a plethora of others??! Awesome.

....P.S. For those of us who enjoy beer and wine, would you rather drink a beer or wine produced by someone who truly cares about their product,

or someone who's main objective is to maximize profits?

Completely true, and agreed. But there still has to be some form of control, and/or checks and balances in place. I'm not saying H S.A.'s quality control is perfect - far from it - but things could be debatably better or worse depending on the shop. Small boutique producers are a great example that you bring up - there's real champs out there, but there's also just as many who are in it for a "get rich quick" form of profit, just as much or more so than the "big guys". The problem is that Cuban cigars are the ultimate opportunity for this kind of attitude to be present, IMO.

[rdb6]

P.S. For those of us who enjoy beer and wine, would you rather drink a beer or wine produced by someone who truly cares about their product,

or someone who's main objective is to maximize profits?

I want the beer or wine that is the best product, not necessarily by the company that cares more. Passion about something is wonderful as long as it translates into good product. It is possible to both maximize profits and be passionate. That's Utopia.

[Leopolis Semper Fidelis]

Not quite

Major companies had already come in and purchased many of the factories and were producing some rather cheap and ghastly cigars just before the time of nationalization.

The "Golden period" was before the 1950's when there was an abundance of individual owners (as opposed to corporates) produced cigars.

Yes, you're spot on here, Roberto. Having said that, Fidel's mob "inherited" a not-so-golden situation - and made it worse.

[Colt45]

Therefore Colt, you need to move over to the Dark side of NC's to get cigars "produced by someone who truly cares about their product"

When (not if, when) Cubans with this kind of dedication are finally able to produce cigars under their own labels, that's where my cigar dollars

will go - at least I'll give them a shot.

From the NC perspective, if I were willing to take the time to explore all that is available these days, I might find a few that were to my taste,

and I'd have no problem smoking them.