As Cuba begins to move away from communism to a more market oriented system the citizens will feel significant pain.
Most Cubans have not paid taxes for half a century, but that will change under a new code starting January 1.
The landmark regulations will change the relations of Cubans with their government and are a signal that market-oriented reforms, launched since President Raul Castro succeeded his brother, Fidel Castro, in 2008, are here to stay.
The recently published code constitutes the first comprehensive taxation in Cuba since the 1959 revolution abolished just about all taxes.
In the 1990s after the collapse of the Soviet Union, the country’s main benefactor, the Cuban government imposed a few scattered taxes, but mostly preferred to maintain low wages so it could fund free social services.
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The government’s free market reforms introduced over the last two years, are designed to encourage small businesses, private farming and individual initiative, along with plans to pay state workers more. Under the new tax code the state hopes to get its share of the proceeds.
The government also envisions replacing subsidies for all with targeted welfare, meaning that the largely tax-free life under a paternalistic government is on its way out.
“This radically changes the state’s relationship with the population and taxes become an irritating issue,” said Domingo Amuchastegui, a former Cuban intelligence analyst who lives in Miami and writes often about Cuba.
The new code covers 19 taxes, including such things as inheritance, environment, sales, transportation and farm land, various license fees and three contributions, including social security.
A sliding scale income tax – from 15 percent for earnings of more than 10,000 pesos (about $400) annually, to 50 percent for earnings of over 50,000 pesos, (about $2,000) – adopted in 1994, remains in the new code for the self-employed, small businesses and farms, but it also includes a series of new deductions to stimulate their work.
For example, farmers may deduct up to 70 percent of income as costs, and small businessmen, who are taxed by income not profit, up to 40 percent, plus various fees and secondary taxes they pay.
A labor tax of 20 percent will gradually be reduced to 5 percent by 2017, and small businesses with five employees or less are exempt.
Eventually all workers will pay income taxes as well as a new 2 percent property tax, but both measures are suspended until “conditions permit” them to go into effect.
The government admits, with an average pay of about 450 pesos per month, or $19, many workers do not earn enough to make ends meet.
“They collect taxes for all these things around the world, it’s normal,” said Havana economist Isabel Fernandez.
“But here we face two problems. On the one hand we are not used to paying for anything and on the other our wages are so low we can’t spare a single peso,” she said.
Under the old system, large and small state-run companies, which accounted for more than 90 percent of economic activity, simply handed over all their revenues to the government, which then allocated resources to them.
The reforms call for large state-run businesses to be moved out of the ministries and become more autonomous.
Under the new tax system they will pay a 35 percent tax on their profits, but can take advantage of a myriad of deductions ranging from amortization and travel to sales taxes, insurance and environmental protection.
Many smaller businesses will become cooperatives or be privately leased and taxed based on income.
The state-owned Cuban National News Agency said Cuba had studied the tax systems of a number of other countries, including several with capitalist economies.
“The experiences of China, Vietnam, Venezuela, Brazil, Spain and Mexico were taken into account, but they were refined to the particularities and conditions of the island,” the new agency said.
The new code is not etched in stone – it can be amended each year as part of the annual budget passed by the National Assembly, and temporarily modified for different reasons by the executive branch of government.
“Like the reforms, it is a work in progress, a work that has barely begun and will take time to put in place,” said a Western businessman who has worked in Cuba for almost two decades.
But, he added, “this is of course a major step forward toward the 21st century and a modern state.”