Cubans to pay taxes for first time in half a century

By Reuters

Greg Kahn / Getty Images, file

A street market sells necklaces and bracelets in Old Havana on November 12, 2012 in Havana, Cuba. Shops like this, until a year ago, were only found in the black market.

HAVANA -- Most Cubans have not paid taxes for half a century, but that will change under new regulations starting January 1.

The landmark move will change the relations of Cubans with their government and are a signal that market-oriented reforms are here to stay.

They were launched after President Raul Castro succeeded his brother, Fidel Castro, in 2008.

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.

The government's free-market reforms introduced over the last two years are designed to encourage small businesses, private farming and individual initiative. There are also plans to pay state workers more.

Under the new tax code, the state hopes to get its share of the proceeds.

'Major step' toward 21st century
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.

A Western businessman who has worked in Cuba for almost two decades told Reuters the reforms would take time, but added, "this is of course a major step forward toward the 21st century and a modern state."

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 annual earnings of more than 10,000 pesos (about $400) 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.

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.

'Can't spare a single peso'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.

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 news agency said.