PROPOSED GOC TAX ON HARD CURRENCY EARNINGS:

C O N F I D E N T I A L SECTION 01 OF 02 HAVANA 001153

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/12/2012
TAGS: CU ECON EFIN PGOV PINR
SUBJECT: PROPOSED GOC TAX ON HARD CURRENCY EARNINGS:
FINANCIAL REFORM OR RESPONSE TO CASH CRUNCH?

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Classified By: COM Michael E. Parmly for reasons 1.4 (b) and (d)


1. (U) Beginning in early January, 2008, the GOC will tax
previously undeclared salaries paid to Cubans employed by
foreign companies. These employees officially work for the
GOC entity CUBALSE, which receives payment for them from the
foreign companies and passes a minimal amount on to the
employee, but earn most of their income from separate, direct
payments from the companies. Accordingly, foreign companies
-- mainly joint-venture partners with state companies -- will
have to declare these salaries for the first time, making
them part of accounting records not normally subject to GOC
scrutiny.


2. (C) These previously-undeclared salaries are actually
"under-the-table" salaries paid by foreign companies to
ensure the livelihood of their Cuban workers, given that
their official salary -- which is a fraction of what the
foreign company pays the GOC directly for their services --
is not enough to live on. Most foreign entities in Cuba
carry out this practice, as do foreign diplomatic missions
including USINT. Although the full text is yet to be
published, Foreign Investment Minister Marta Loma said the
measure is meant to, "Normalize relations between foreign
investors and Cuba."

Comments:
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3. (C) The "under-the-table" salaries are among the main
draws that motivate Cubans to leave their state jobs and
flock to joint-venture jobs where their meager state salaries
are complemented by more attractive hard-currency payments.
Heretofore, however, these have been unaccountable to the
GOC. The new measure could be justified by the GOC's
long-running anti-corruption campaign as well as its more
recent attempts to improve discipline and accountability
throughout the economy. By holding joint-venture partners
accountable, the measure would impose some transparency on
the practice. However, contacts in the hotel industry and
other diplomatic missions have told us they believe the GOC
is really taking this action because it needs to raise cash.
This theory was given further credence recently when CUBALSE,
the GOC entity that officially employs our LCN staff (and all
other employees of diplomatic missions and international
corporations) approached USINT and asked that we alter our
regular payment to them by reducing the number of reported
leave days taken by LCN employees and instead spread those
hours over the next several months. The result would be a
significant increase in our December payment to CUBALSE.
When our budget office refused to go along with this bit of
accounting chicanery, the CUBALSE officials became very
angry.


4. (C) Whatever the motivation, the measure would also make
it more costly for foreign companies to continue the practice
and could therefore become an incentive to do away with
"under-the-table" salaries altogether. If this were to
happen, the GOC would have effectively withdrawn one of the
main incentives for Cubans to leave their state jobs--a
problem that has been recently reported by the GOC press,
particularly affecting many teachers who have been leaving
the education sector in droves.


5. (C) In light of current GOC plans to open up to more
investment, it is unclear what effect the measure will have.
However, if the practice of hard-currency salaries remains
even after taxes, a fatal flaw in the GOC's socialist --
egalitarian -- economic model will be fully exposed: Some
Cubans are paid significantly more than others. It is
unlikely that the GOC will be capable of fully monitoring and
accounting for all or even most "under-the-table" salaries.
Rather, inferring from usual GOC implementation, enforcement
of the new measure will more likely be uneven and imperfect,
making it harder to eradicate what could become legal and
acknowledged income inequality in Cuba.


6. (C) Foreign companies would likely only increase salaries
if worker productivity were to increase. But because
salaries are to be taxed, one effect is certain, regardless
of the level of enforcement. Cubans working in joint-venture
companies will receive either lower declared salaries
(because they are to be taxed) or lower undeclared salaries
(because the GOC will no longer disregard the practice, to
continue the practice would be more costly). Lower
salaries will mean a smaller performance incentive, which
would equate to poorer services and lower productivity,
precisely the opposite effect of that desired by the GOC. In
his July 26, 2007 speech, Raul Castro spoke of the need--and
his desire--for greater foreign investment in Cuba, so long

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as that investment is respectful of Cuban sovereignty.
Foreign business contacts who briefed us on the new
regulation commented--tongue in cheek--that either Raul has a
funny way of showing his open attitude, or he is not fully in
charge. Those are both valid possibilities.
PARMLY