Saturday, February 18, 2012

Tax lessons as private sector grows

Cuba economy: Tax lessons as private sector grows
18 February 2012 Last updated at 09:11 GMT
By Sarah Rainsford BBC News, Havana

It is a process that fills many in the capitalist world with dread every
year.

Now, for the first time, many in Communist-run Cuba are facing the same
chore: filing a tax return.

It is more than a year since the government increased the number of
licences available for privately-run business on the island.

In Havana, myriad DVD dealers and watch repairers, fritter sellers and
cafes now jostle for custom on the roadside.

Cuba's new entrepreneurs are free to earn more than the small state
salary most workers take home of under $20 (£13) a month. But unlike
state employees, they now have to pay taxes.

"It'll take a bit of work for people to understand they have to pay,"
says Maritza Ramos, a housewife-turned-seamstress who sells her
colourful creations on a street stall.

"We haven't had that concept here for years, so it will take a bit of
getting used to."

Cuba's revolutionary leaders abolished personal income tax in the late
1960s.

It was reinstated in a limited form in the 1990s when the government
allowed some private businesses to operate, softening the blow as Soviet
subsidies to the island disappeared along with the USSR.
Money counts

Now more than 358,000 people - 9% of the workforce - are registered as
cuenta-propistas, or self-employed.

In the leafy garden of a Havana tax office, some of them queue to
consult an adviser. A noticeboard is covered with cartoons explaining
the new system; posters remind first-time payers that they're making a
valuable contribution to the state.

"It's all strange," says retired military man Carlos Taquechel, 75.

State pensions do not go far, so he works in a supermarket car park. He
and his wife also rent out a room to make ends meet.

Mr Taquechel says the difficulty is paying the monthly fixed-rate tax
for their business. Income tax is calculated on top.

Recently the couple have been unable to rent out the room, as a previous
lodger caused damage that they are still repairing.

Even so, they are still having to pay tax, they say.

"The system is new and needs polishing," Mr Taquechel says. "It's like
when a child learns to walk. It will fall over many times, but get up
again, more experienced. I think we're in that process now."

The government has made some adjustments, though talk of doubling the
annual threshold for income tax to 10,000 pesos (£265; $416) has not yet
become reality.

Currently, more than 90 activities qualify for a "simplified" tax
system, a fixed monthly sum regardless of earnings. Palm-tree trimmers
are the lowest contributors at 20 pesos a month.

Those with higher earning potential, including restaurant-owners and cab
drivers, pay sales and income tax on top. There is a sliding scale of up
to 50% for earnings over 50,000 pesos a year.

"We needed to update the economic model," says economist Joaquin
Infante, who says Cuba is in a "critical" situation.
Give and take

Squeezed by a US trade embargo for five decades, the island was battered
by the 2008 financial crisis and multiple, damaging hurricanes in the
same year.

Cuba still has to fund its system of subsidised products and free
universal education and health care.

"The revolution was very paternalistic. So [the reforms] being taken are
to see more efficiency, more productivity," Mr Infante says.

"People also have to start paying taxes: contributing to the state, not
just receiving."

The government plans to cut tens of thousands of state jobs in the
coming years to reduce costs.

So Cuba's accountants are bracing themselves. Across the country, they
are attending state-run courses in the new tax system.

Many are becoming cuenta propistas themselves: fathoming out other
people's tax returns and making payments is now a good business.

The classes also teach the ethics of taxation. But that is where one
student in Havana spots a hitch. His clients say high taxes risk
strangling their businesses.

"Many feel they have to lie about the income they should pay tax on,"
Yordanis Avila says. "I think for the average Cuban, with his little
street cafe, it's too expensive to tell the taxman the truth."

In an economy which functions largely in cash, with few receipts, tax
evasion will be hard to tackle.

Still, Joaquin Infante estimates the expansion of small businesses has
already netted the state 1bn pesos ($400m). It has also brought many
workers at least partially out of the shadow economy.

"Seventy-five per cent of the new self-employed were either retired, not
working or working illegally before," he says. "Those people are now
contributing to the development of the country."

Many businesses have struggled this first year and a quarter have folded.

But those who have survived say they are better off now, even with high
taxes.

"Of course!" says Maria Julia, a former transport ministry employee who
now sells costume jewellery at a street stall.

"I can go a day or even two without a sale and the taxes are high... I'm
never going to be a millionaire but there's always money to be made here."

http://www.bbc.co.uk/news/world-latin-america-16809185

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