For Cuba's new entrepreneurs, the tax man cometh

August 12, 2011 - 3:14 PM
Cuba Taxes and Entitlements

In this photo taken Friday, July 15, 2011, Cuba's DJ David plays music at the 'Fashion Bar Havana' restaurant in Havana,Cuba. After five decades under Fidel and Raul Castro, the concept of a personal tax obligation is practically unknown in a society where the government controls nearly the entire economy and salaries average about $20 a month.(AP Photo/Javier Galeano)

HAVANA (AP) — In Cuba, the tax man has finally arrived.

After five decades under Fidel and Raul Castro, the concept of a personal tax is practically unknown in a society where the government controls nearly the entire economy and salaries average about $20 a month. Quite the opposite, islanders have grown accustomed to the Communist government providing for them: food rations, universal education and health care, pensions, even free lunches.

But under Raul Castro's crusade to cure an ailing economy, those basic subsidies face cutbacks and many Cubans are being pushed out of state jobs into the private sector, where they face tax rates that can total more than half their earnings.

Like it or not, Cubans will have to get used to rendering unto Caesar.

"Having my own business was my dream ... but in truth it frightened me," said Luis Antonio Veliz, who opened the Fashion Bar Havana restaurant in his backyard last December after the government began issuing new licenses for independent eateries.

Veliz had studied gastronomy but had no training in accounting. "I went to the Ministry of Labor and they explained everything to me ... how to manage the books, where to pay the taxes, the bank papers to be legal.

"And after all that I was even more frightened!" joked the 33-year-old, who by necessity has become an expert on costs, profits and red tape.

Since the new system began last year, some 178,000 private work licenses have been issued. That comes on top of 147,000 still in use from the 1990s, when Cuba enacted a similar but narrower opening to help battle a severe economic crisis caused by the collapse of the Soviet Union.

Officials say they expect the number of taxpaying private workers to keep growing rapidly. The goal is to have 1.8 million of the country's 5 million workers in the private or cooperative sector by 2015.

Taxes are already on the books, 11 different kinds of them, but officials have never applied them to the vast majority of state workers. Since two-thirds of the island's 11 million people were born after the 1959 revolution, few have ever been asked to pay a centavo in taxes, and the idea of starting now is a shock to many.

The new small business owners face tax rates of up to 50 percent on personal income, 10 percent on sales and in some cases a 25 percent social security tax. Officials have imposed a payroll tax as well, though it has since been temporarily suspended.

The Communist Party has declared that taxes should encourage economic efficiency and help fill the state's coffers.

But taxes under the socialist system have another purpose as well: limiting personal enrichment and inequality, said Vladimir Regueiro, vice chairman of Cuba's tax agency. He said in an interview with The Associated Press that the government remains committed to enormous public spending on social projects such as free health care and education, subsidized food, transportation and other services.

While the private sector is growing quickly, officials expect government to remain the dominant employer, Regueiro said. He added that the success of the economic reforms depends mainly on making state-run enterprises efficient.

Some rules have been tweaked, however, to soften the tax blow. Select businesses can deduct as much as 40 percent for expenses. People in some professions pay a fixed fee each month rather than struggling with cost and income calculations. Entrepreneurs of retirement age no longer have to make social security payments. However, analysts say that's not enough to lure enough people off the state payroll and onto the tax rolls.

After an initial boom of modest cafeterias and businesses selling bootleg DVDs, clothing, cheap jewelry and other merchandise, many would-be entrepreneurs have begun handing in their licenses or are struggling to survive financially. Others continue operating privately but on the illegal, black market. Many blame the taxes.

To give entrepreneurs a fighting chance, "the Cuban authorities should stimulate this sector with a tax system that is less complicated, less rigid," said Rafael Romeu, president of the U.S.-based Association for the Study of the Cuban Economy, which studies ways to transition the country to a free market economy and democracy.

"The point of collecting taxes (from the entrepreneurs) is to bring them into the formal sector so they can grow by establishing ties to other small businesses and develop. A business that operates illegally has much less margin for growth and can't get credit," Romeu added.

Finance Minister Lina Pedraza told Cuba's parliament in December that entrepreneurs should be keeping about 20 to 25 percent of what they make.

Romeu said that would be an acceptable profit margin in the developed world, but is hard on Cubans launching tiny businesses without the benefit of capitalist mechanisms like a wholesale market and accessible credit.

The dean of Cuba economy-watchers, Carmelo Mesa-Lago of the University of Pittsburgh, said taxes "are still excessive and should be lowered much more to create incentives for agricultural production and entrepreneurialism."

Rafael Betancourt, a Cuban economist who works on the island with foreign non-governmental organizations, wrote in a recent article that businesses should have a grace period to recover their investment before heavy taxes are imposed.

He said the current tax rules discourage people on the thriving black market from getting a license and making their business legal.

Regueiro acknowledged that "the matter of taxes is always controversial."

"The payment of taxes constitutes a way of contributing to society, and that is a concept that we have to recover," Regueiro said. "For many years we have been far from that idea and now we are reviving it." He noted that the number of taxpayers has doubled since last year.

Regueiro said officials are still not applying some taxes that are on the books, such as those on state salaries and on property. The possibility that freeze might be lifted appalls some.

"I have never paid taxes. After all these years, the word has disappeared from Cubans' dictionary," said Iliana Ocampo, a 43-year-old office worker. "It sounds more like something from a capitalist country, and talking about taxes in Cuba is a little like (talking about) extraterrestrials."