Identifier
Created
Classification
Origin
08HAVANA23
2008-01-09 20:05:00
CONFIDENTIAL
US Interests Section Havana
Cable title:  

CUBA: UNDER-THE-TABLE SALARIES TO BE TAXED

Tags:  AMGT CU ECON PGOV PINR PREL 
pdf how-to read a cable
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RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCOGCA/COMNAVBASE GUANTANAMO BAY CU
RHMFISS/HQ USSOUTHCOM MIAMI FL
RHMFISS/JOINT STAFF WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 HAVANA 000023 

SIPDIS

SIPDIS

DEPT FOR WHA/CCA
ALSO FOR WHA/EX

E.O. 12958: DECL: 01/08/2018
TAGS: AMGT CU ECON PGOV PINR PREL
SUBJECT: CUBA: UNDER-THE-TABLE SALARIES TO BE TAXED

REF: HAVANA 1153

Classified By: COM: Michael E. Parmly: For reasons 1.4 b/d

C O N F I D E N T I A L SECTION 01 OF 02 HAVANA 000023

SIPDIS

SIPDIS

DEPT FOR WHA/CCA
ALSO FOR WHA/EX

E.O. 12958: DECL: 01/08/2018
TAGS: AMGT CU ECON PGOV PINR PREL
SUBJECT: CUBA: UNDER-THE-TABLE SALARIES TO BE TAXED

REF: HAVANA 1153

Classified By: COM: Michael E. Parmly: For reasons 1.4 b/d


1. (SBU) SUMMARY: Resolution 277, dated December 13, 2007,
from the Ministry of Finance and Prices mandates that
previously undeclared income from Cuban employees of foreign
entities be taxed. While technically the tax will be levied
directly on the workers, companies will nonetheless be taxed
indirectly, sending a negative signal to the foreign business
community as well as to potential new investors in Cuba. The
tax also applies to employees of foreign missions, but
without a requirement that those missions report salaries.
End Summary.


2. (SBU) Reftel reported that beginning in early January,
2008, the GOC would tax previously undeclared salaries paid
to Cubans employed by foreign companies. Thus far, the GOC
still has not officially made public anything on the matter,
but many Cuban workers -- as well as the press -- are talking
about Resolution 277, dated December 13, 2007, from the
Ministry of Finance and Prices, which outlines how the tax
will work. While the resolution is still an internal
Ministry document, it has been widely circulated among Cubans
who work in entities which will be affected.

"Gratifications"
--------------


3. (SBU) Undeclared salaries, referred to in the resolution
as "gratifications," are defined as "any money received in
addition to and independent of a salary." Per Reftel, most
foreign entities in Cuba, including USINT and other foreign
diplomatic missions, carry out this practice. In ordinary
practice, these are salaries paid directly to an employee in
Cuban convertible pesos (CUCs). Officially, these employees
receive only a small portion of the CUC-denominated salary
that is paid directly to the Cuban government entity CUBALSE.
The employee portion is paid in ordinary Cuban pesos, which
are worth 24 times less than the CUC.

Who is affected?

--------------


3. (U) According to the resolution, those affected include
Cubans working in an office or branch of foreign: a)
companies; b) banks and financial companies; c) airlines; d)
travel agencies; e) other representations of foreign entities
accredited in Cuba; f) press offices and other foreign media
outlets; g) diplomatic missions and representative offices of
international organizations; h) other locations that employ
foreigners accredited in Cuba.

Requirements
--------------


4. (SBU) Cubans working for the above employers will have to:

-- Register as a tax payer at the nearest municipal tax
office within 60 days after January 3, 2008.

-- Pay a partial amount of the tax every three months using
the tax bracket applied to the few "cuentapropistas" (private
entrepreneurs) left in Cuba. Resolution 277 essentially
gives these workers the tax treatment given to
cuentapropistas under an older resolution from 1995,
Resolution 24/95, which includes tax brackets going from 10%
to 50%.

-- Settle final payment at the end of the year -- within 60
days after each December 31.

-- Regardless of the currency paid by the employer, tax
payment is to be made in Cuban convertible pesos and at the
exchange rate of the day in which the tax is paid.

-- Cubans working for a joint venture controlled by the Cuban
military, such as Gaviota hotels, must register with the
military's Tax Administration Office, charged with collecting
and accounting for tax revenues for the military's

HAVANA 00000023 002 OF 002


enterprises.


5. (U) Within their business accounts, employers -- with the
exception of employers under g and h from paragraph 3 above
-- must account separately for the amounts paid as
"gratifications." It should be noted that diplomatic
missions are exempt from this requirement. In addition,
employers must reconcile their Cuban employees with the
National Tax Administration Office.

Effect on USINT employees
--------------


6. (C) USINT normally pays CUBALSE, the GOC employment
agency for all diplomatic missions, an average annual fee per
employee of CUC 3500. In turn, USINT Cuban employees receive
an average annual salary from CUBALSE of CUC 120. This
"vanishing act" of Cubans' salaries best explains the reason
for USINT's -- and all other foreign employers -- undeclared
"gratificaciones" payments. Mainly because of perks such as
the "gratificaciones," Cubans working for foreigners have
long been perceived by the GOC -- and indeed by many other
less fortunate Cubans who do not get a complement to their
government salary -- as spoiled and over-privileged.


7. (C) According to USINT Budget and Finance, about 85% of
the 264 USINT Cuban employees will fall under the 15% tax
bracket, while only a few will fall under either the 10% or
20% bracket. The average annual tax per employee would
amount to CUC 855 (the top paid employee would face a tax
bill of CUC 2,175, while the lowest paid would pay CUC 390).
USINT employees would pay a total annual tax of CUC 225,700.
CUBALSE claims to employ 2,500 employees throughout the
diplomatic community. Assuming USINT's average wage is
representative of the rest of the diplomatic corps, the GOC
could collect as much as CUC 2,137,500 annually from Cubans
working for the diplomatic corps alone. ACOREC, the GOC
employment agency for foreign companies, obviously stands to
collect a considerably more.

Comments:
--------------


8. (C) It is still unclear what the real intent of the
measure will be or what its effect will be. Clearly there is
a need for hard currency on the part of the GOC and this
measure provides yet another source for it. However, the GOC
may also want to minimize the "perks" of working for foreign
companies, as "gratificaciones" are clearly incentives that
make those jobs much more attractive than government jobs,
which incidentally, are losing more and more competent
workers to foreign companies. While the tax will be levied
directly on the workers, most companies will likely assume
the payment of the tax for their workers. If companies elect
not to assume the tax burden, they will nonetheless be taxed
indirectly through decreased worker productivity. Making
business in Cuba even more costly and burdensome than it
already is will certainly make foreign businesses think twice
about expanding their operations in Cuba and will send a
negative message to potential new investors.


9. (C) For workers, who for the first time will have to pay
taxes on income that had never been taxed before, the
resolution will be a hard blow. They will essentially endure
a pay cut for performing the same amount of work. This will
surely hurt worker performance and by extension the company's
bottom line. While the Cuban workers earning these
additional salaries are a minority, they are a minority with
some clout. For one thing, they purchase goods and services
from the government using their additional salaries. More
importantly, they have been privileged by the regime and
being so privileged may be even more resentful of an action
that hurts them very directly -- not the way to build support
among those whose special talents may be needed in a
transition.
PARMLY