The Taxman comes to Cuba (Part I)

Let me tell you how it will be,
There’s one for you, nineteen for me,
‘Cause I’m the Taxman,
Yeah, I’m the Taxman.

Should five per cent appear too small,
Be thankful I don’t take it all.
‘Cos I’m the Taxman,
Yeah, I’m the Taxman.

We all like to complain about taxes and none of us likes to pay them.  We also constantly search for ways of reducing our tax burden by enumerating deductions and listing expenses.  So, I extend a warm welcome to our Cuban brothers and sisters to the wonderful world of paying taxes. 

Hopefully, the requirement that they now pay taxes will be combined with real opportunities for them to set up micro-enterprises and small businesses that can actually be free to earn profits, provide employment, and offer better goods and services to their brethern at lower prices than in the past.  Vamos a ver.

As readers will already know, last Friday Granma published a somewhat confusing and contradoctory article outlining the new tax system for Cuba's self-employed workers (see here and here for links to international news coverage).

Then, this Monday the government released two important additional legal documents (together numbering over 100 pages!).  These numbers 11 and 12 of La Gaceta Oficial further detail the "New Rules" that will govern (1) the layoff of state workers, (2) self-employment, and (3) the tax regime.

While I am still working my way through the new tax code as described in La Gaceta, below in Part I of this post, I will offer my preliminary assessment of these recent developments.  Next week in a follow-up post (Part II), I will give my take on the detailed regulations as contained in La Gaceta.

* * *

The Granma article establishes that there will be four different kinds of taxes and two different tax "regimes."  One "complejo" (complex) tax system will apply to the 87 types high earning, small-to-medium-size self-employment enterprises/occupations that hire employees.  Another "simplificado" (simplified) tax system will be for the 91 micro-enterprise occupations unable to hire employees.  The four kinds of taxes are:

1. A new social security tax for all the self-employed, which will be calculated each month and be paid three-times a year at a rate of 25% of their incomes (examples are given in the sliding scale at the end of the article) - this tax will NOT be paid by those self-employed workers who are already retired and collecting social security, nor by those who are currently working in a state job ("que tengan vinculo laboral").

2. A sales or services tax according to the type of occupation/license they have (this may be deductible at the end of the year).

3. A personal income tax (with a rate that increases as earnings increase, 10%-50%) - the language of the Granma article seems to hint that the government recognizes that the past self-employed tax system was abusive for the small-scale self-employed and therefore unfair by stating, "este ultimo ahora modificado con el objetivo de cumplir el principio de que se aporte en correspondencia con la real capacidad economica."

4. A tax for contracting workers (25% of the worker's salary).

On the negative side, the government's approach is dangerously paternalistic and overly concerned with control, order, and preventing the emergence of a new rich class of entrepreneurs and not aimed enough at encouraging growth, dynamism, institutional support (credit and wholesale markets). The fact is that if the government is relying on these new entrepreneurs (or old/existing ones) to play a key role in the future in the provision of jobs, goods and services, and hopefully reducing prices and the role and size of the black market, then it should be treating them with less paternalism (if I were an entrepreneur, I would have found much of Friday's Granma article condescending and insulting) and more respect.

The article in large part is aimed at "educating" the Cuban public in the culture of taxpaying. And it is that tone of a school teacher that I imagine that many Cubans will find paternalistic and insulting.  The article also perhaps does more to confuse and obfuscate how the tax system will work than clarify it, given that it seems to be an overly complicated system - especially for one being instituted in a country with little history or experience with taxes.

On the other hand, if I read the article correctly (and some of this is clarified in the Gaceta regulations published on Monday), there are some positive signs in the details of how the new tax regime will work.  These are:

1. A big portion of the self-employed workers (91 of 178) will fall "under the threshold" ("la sombra de transgresion") [meaning that they make under a certain amount (5,000 pesos), do not hire workers, and only operate a single self-employed enterprise] and will either not pay income taxes at all or have a simplified system of monthly tax payment (this seems to be the same simple monthly quota [cuota fija minima] of old) and will not have to file year-end tax returns ("declaracion jurada"). [They will have to pay a social security tax however.] This will eliminate a lot of bureaucracy and allow a bit of oxygen for the smaller enterprises to grow.  However, one old complaint among many of the self-employed is that they have to pay the monthly quota regardless of how much they actually make and regardless of how much they invest in their business.

2. The more "complex" operations (those with greater earnings/profits and those which can hire employees) (the other 87 occupations) will also have to pay a monthly quota and then file a year-end income tax return. However, one change is that unlike in the past now there WILL be "refunds" of overpayments of taxes at the end of the year. These more complex operations will also have to set up bank accounts (if they earn over 50K pesos per year) and have the ability to deduct up to 40% of their expenses. Still, this detail is new and I think would be welcomed by entrepreneurs who have not been able to deduct more than a standard 10 percent of expenses in the past.

3. The new sliding scale for tax rates looks encouraging on its face (those who make under 5,000 pesos pay no income tax; those who earn above 5,000 will pay 10% based on their previous month's income; and those who hire workers will pay a 25% tax based on that worker's salary; those who earn more than 5,000 will be taxed at higher rates in step increments ranging from 10-50 percent).  However, as I say above, the article does not make these details very clear. The tone of paternalism in the article and the strange order that the article lays out the new regulations makes it hard to follow and hard to glean accurate information.  It remains to be seen if the Gaceta version is clearer and less paternalistic.

4. There is a section toward the end of the article where it is stated that a greater portion of these taxes will stay in individual municipalities to support local projects and investment than in the past. This sounds to me like a good idea in terms of decentralization but it is far from clear how these monies will be invested and who will control them.

More to come...