Key to control the economy

The Cuban government has extended to state-run enterprises the application of taxes that already regulated other economic activities and sectors.

Starting October, the State will start charging the state-run enterprises for the Special Contribution to Social Security and personal income tax.

Foto: Jorge Luis Baños/ IPS

The news spread like wildfire through the streets, the press and the Internet. It unleashed concerns among Cubans, motivated extensive radio and television programmes, public forums with government officials and also served as gossip for the opposition when it actually is something common in any world economy. But the decision of applying in Cuba a special tax for social security and on personal income to workers in state-run enterprises is not a novelty.

Since January the government had announced in television programmes that that step, established in Law 113 of the Tax System, would be taken in the second semester. The agreement is based on the Budget Law of 2016, which the National Assembly of People’s Power approved in last December’s session. A few days ago, the authorities only gave specifications: date, rates and other details.

 

Both taxes will come into force starting October. The workers of the business system with wages higher than 500 Cuban pesos (*) will make the special contribution to social security: 5 per cent of their incomes. The income tax, meanwhile, will be 3 per cent for persons with wages of more than 2,500 pesos and 5 per cent when they earn over 5,000 pesos.

 

The representatives of the Finance and Prices Ministry (MFP) specified that these taxes will be applied only if the worker’s incomes include, in addition to the basic wage, the additional payment of the entities in Business Improvement, payment for results or the distribution of profits as an incentive for efficiency.

 

By extending personal income taxes to workers of state-run enterprises, the authorities equal them to the fiscal treatment applied for some years to agricultural and cooperative producers, the self-employed and the private and culture sector, as well as the wage earners in the companies of the Mariel Special Development Zone. Why shouldn’t a State worker pay the same taxes as a person from the private sector, when they earn similar incomes?

 

The measure is also a reaction to the take off the mean wage is experiencing in state-run enterprises: it grew 47 per cent in two years, up to 743 pesos at the close of 2015, since the payment for results system came into force in 2014, first with Resolution 17 and now with Resolution 6 of the Labour and Social Security Ministry (MTSS).

 

But this tax will have scarce reach even in the state-run business sphere. Those who earn more than 2,500 pesos a month in the state sector are still a minority.

Some industries have reacted more successfully than others ever since the workers started earning according to yields and labour results.

Some industries have reacted more successfully than others ever since the workers started earning according to yields and labour results.

 

According to information given to the press by the director of the Labour and Social Security Organisation of the MTSS, Guillermo Sarmiento, at the close of the first semester of this year only 25 enterprises were paying wages of more than 2,500 pesos as an average per month. Around 14,000 workers belong to these enterprises. The enterprises that paid an average monthly wage of more than 1,000 pesos were 405 and 1,306 entities paid more than 500 pesos.

 

On the other hand, the special contribution to social security, which is also already being applied to the workers of other sectors of the economy, will have a greater reach and, also because of this, has unleashed controversies and greater concerns. According to statistics contributed by the MTSS and the National Tax Collection Office (ONAT), more than 1.3 million workers of state-run enterprises will contribute this tax. The personnel of entities immersed for several years in a process of Business Improvement, that of foreign investment and of the platform fishing fleet are already doing so. In budgeted areas, sectors where the wages were increased in recent years, like public health, education, the General Comptroller’s Office and the Attorney General’s Office, the workers had gradually joined the payment of this tax.

 

This special contribution comes in the aid of one of the strongest expenditures of today’s State Budget: social security; more than 5.7 million pesos are previewed for this year, fundamentally for the payment of pensions to more than 1.6 million persons. In 10 years these expenditures had shot up 63 per cent due to increases in the minimum amount for pensions and the increase in pensioners in a society with a marked aging tendency and a decrease of the active labour force.

 

The enterprises and other workplaces pay a contribution to social security for their hired work force, but it’s not enough to cover all those expenditures. To complete them, the State has been extracting between 1.2 and 1.3 million pesos out of the public funds for several years.

 

Though the special contribution to social security is neither a novelty, the news generated controversies especially because of the legislated wage level for its application, 500 pesos, in an economy burdened by the low purchasing power of the Cuban peso. The government has taken measures to control inflation and reduce the prices in the retail markets, but they are still too high for the mean Cuban pocket.

 

The gradual extension of the tax system is a fundamental line in the transformation of the Cuban economic model: it marks the evolution toward an organised model through economic and legal regulations, instead of the method of bureaucratic-administrative procedures that characterised decades of the centralised system. (2016)

 

* Because of the currency and exchange duality in Cuba, the Cuban peso (CUP) is equal to a convertible Cuban peso (CUC) and one U.S. dollar (USD), according to the official exchange rate. But in the CADECA Exchange Houses one CUC is equal to 24 and 25 CUP. While the official exchange rate governs in the business activity, in the State Budget and in wholesale commerce, the CADECA rate only functions in part of the retail commerce. The segmentation of the markets and the price system, together with the system of subsidies, slant any calculation of income equivalencies between these currencies.

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