With the adoption in 2012 of the 113 Act of the Tax System, and its implementation in early 2013, a process of fiscal and financial organization begins ranging from population to institutions. Professor Saira Pons, expert of the Centre for the Study of the Cuban Economy, deepens about these current issues in taxation.
ES: The tax law was one of the first to be applied in the context of changes in the country: do you think it was at the right time?
SP: I think so. The development of tax systems in any society depends on how the property is distributed. In the case of Cuba, the dominance of state ownership and centralized management of resources through planning gave the tax system a minor role. As state funding mechanism, it lost importance due to the possibility of also capturing profits after tax and price differentials. On the other hand, since they were not extended to market relations, it didn’t make sense as a regulatory instrument of the behavior of companies and citizens.
When the expansion of the non-state sector and new forms of property management begins, the state loses its ability to directly control these resources. There is greater uncertainty about the budget revenue and regulatory mechanisms. It is then when is needed to strengthen the tax system. Arguably is a condition for allowing the development of non-state forms.
ES: How can we evaluate the implementation of the law until now?
SP: There are always things that could be done better, but the way they implemented the law responds to the starting conditions. First, there was very little development of institutions and the tax culture. That makes the application to be gradual, to be gaining in experience, allowing then go into more complex elements, and also ensures that the scheme is as simple as possible.
Another advantage is its flexible nature: there is a possibility to update and correct the rates every year by the Annual Budget Law, which is also made by orders of the Ministry of Finance and Prices. Sure, it is still insufficient, especially the self-employed have great dissatisfaction with the design of the law, and that is demonstrated by the high levels of evasion they are presenting. In this case the law has been adapting slowly, but perhaps even the speed of these corrections is insufficient.
Any legislation of this type involves a counterpart in control and penalty to irregularities How does this phenomenon behave? How lenient or stringent sanctions may be?
I will refer to the non-state sector. In Cuba there are few mechanisms to verify if someone is stating – or not – 100 percent of its income. First, the information cannot be cross referenced. They do not allow the self-employed to deduct all of his expenses and therefore they cannot claim what they have bought from another self-employed , cooperative or state enterprise.
Thus a source of information is lost. On the other hand people use cash, and there are few electronic records of their transactions. No credit or debit cards are used that at least make possible to monitor the level of expenditure and make estimates of revenues.
It also happens that such taxpayer is still very small, its contribution to State revenue accounts for only 4 percent, and many times the cost of verifying his statement is more than what they don’t declare.
During 2013 studies were made, especially among private taxis drivers and cafes. From there it was inferred what the gains they were having, and according to those estimates fines were imposed. The problem is that they were homogeneous for an important group of taxpayers, and that created discomfort, were considered unfair. In these cases there is always someone who meets estimates and who does not.
We also verified 30 percent of the statements, and then by underreporting there was an estimated 130 million pesos debt as Onat officials recently assured. Of these, 75 million were collected in 2013, and the rest was deferred with 1 percent interest, showing some flexibility. They reiterated that at present the fundamental role of Onat is educational.
Fines are set at fixed amounts or percentages. In the first case they have a maximum of 30 percent of the principal due and in the second case of 10 thousand pesos. It is also considered the temporary or permanent withdrawal of the license. A last resort is established by law for the seizure of property and property rights. Since 2012 they have processed 77 cases of tax evasion.
ES: What other obstacles does the law find when implemented?
SP: The underdevelopment of tax institutions and by institutions I mean the broad sense of them: political, legislative, administrative, cultural. At taxpayer level there is little domain of tax issues, and the worst is not ignorance about how much to pay, when and how, but they do not understand why they have to give this tribute to the state. They do not realize that this would benefit them at all, and that’s where more progress is needed. The keys to strengthen the fiscal pact are greater participation and transparency, and to raise the quality of public spending.
The tax law is not reached broad debate with the population, as the Social Security Act and the Labour Code did. And the debate is not just for approval, must go repeating in public consultations, studies on the actual conditions of the taxpayers that allow them adapting the law.
In addition, the tax administration suffers the common limitations of public entities: problems with the workforce in terms of numbers of people, motivation and skill, working conditions, computerization.
ES: How can we define the tax culture? What role do you give it?
SP: It has a key role. As I had mentioned, it is not only the fact that people know what their obligations and how these affect their finances, but also lies in knowing the significance of this contribution: that is an obligation of every citizen and grants certain rights. It is a covenant of mutual obligations. Several studies worldwide have shown that it significantly influences the level of collection.
Of course, in our case the low tax culture affects not only the taxpayers, but also to members of the tax administration, and inevitably those who design policies and laws. In all cases it has little experience, for obvious reasons. Even in academia there is an important theoretical vacuum, also for lack of public information and survey-based studies, which are very difficult to perform by the number of approvals required.
ES: Is it possible to implement, or would be required, transparency mechanisms for people to have greater certainty or knowledge about what is done with that money?
SP: Yes, they are required and can be implemented. Not only mechanisms for greater transparency but also for greater participation, reinforcing the commitment of the people. For this we must consider two levels: the town, which is where important part of the revenue goes from the non-state sector and level of government.
The territory gives more opportunities for direct participation. For example, in many places they have implemented participatory budgeting: a certain percentage of local revenue, projects that same people propose. Internet facilitates this because the local government has a page where people upload proposals, and the most voted project is being financed. It is a widespread practice in Latin America
There are some variants of this type could be assessed for taxpayers feel more committed to pay. It is essential to feel that somehow they are involved in the management of public finances, which have a say in how their taxes are spent.
At the level of government involvement may be more complex, but then it should enhance transparency and seek approval from people. There are still insufficient television reports and written statements addressing the issue of public finances. Similarly, if there is satisfaction with public services may have greater incentives to contribute.
ES: From the local contribution for local development, is expected that municipal governments become more proactive economic actors with greater initiative?
SP: Yes, but there is a difference between financial decentralization, particularly in terms of Cuban pesos, and real decentralization. With this contribution, it is likely that local governments have found that a provision of liquidity in domestic currency to use in certain things.
However, they cannot always go with the money in pesos to acquire in a market where they need foreign currency to import what they need. This is subjected to Liquidity Certificates (CL), which are allocated on a discretionary basis across the country. So real effects, as if they could not use this money for what interests them. It is the conversion problem, and also for you to invest, they should be included in the plan of the national economy and approved. That requires from the State to create a series of conditions for such investments to be carried out.
As the non-state sector evolves, perhaps local governments can acquire certain services between the self-employed and cooperatives, but currently still rely on the state to make an expense or an investment with their money.
ES: The law specifies that taxes are for health, culture, sports, social care, education … seems to be a change in the concept of services that were conceived as fully subsidized , now they talk of citizen contributions in these areas …
SP: The State per se does not create value, the resources a government manages come out of people’s work, of what people are able to contribute. That can be captured explicitly through taxes, or implicitly, from lower wages, higher prices … Indeed, the change is there: make explicit the contribution that citizens have always done. I think it’s something positive.
ES: How then would state enterprises be?
SP: Previously SOEs performed their duty, and then left them to net income, the state could take 100 percent, because of performance concept of state investment. It has been said that in 2014 there will be a limit to that contribution.
All companies have up to 50 percent of their profits after tax for certain expenses, including remuneration for workers results, research and development (R & D), training, amortization of loans, capital increase work approved investments and compensation fund. The instance of approval is no longer the ministries, but the Higher Business Management Organizations (OSDE).
Also, once they pay off their contractual commitments with the State, as to provision of goods and services, they can sell the surplus in wholesale markets at prices of supply and demand. The combination of these mechanisms can correct incentives for businesses, they will have incentives to be more efficient and increase income.
While this is positive in the short term will mean a negative impact on state finances. In 2014 at least 1 billion pesos will stop entering the state budget, according to statements by the Ministry of Finance and Prices. Therefore it is also combined with the decision to reduce subsidies to companies that have losses and make decisions about those that continue like that for two years. There has been talk of a merger, downsizing or even closure of some organizations. This is essential to move towards a more efficient system.
ES: What will be the expectations in tax matters regarding the new law on foreign investment?
SP: In the Special Zone Development Mariel very special tax incentives have been granted, exemptions and there are great benefits that show the real intention of the State to attract foreign capital, at least there. It might be expected that a review of the current regime is made, and that such benefits are extended to foreign investment out of Mariel.
That’s what many investors expect, that others consider unfair, in a way, a different and less favorable for those businesses that have been for years in Cuba, contributing to exports, import substitution, technological renewal and creating jobs, or who are simply interested in participating in other geographic areas that also need investment.
The current trend in the world is to give tax incentives to specific behaviors, such as investment in R & D, the use of clean technologies, or export. It is becoming less common set special rules depending on the type of property or otherwise, to generate imbalances in competing.
Apart from this, it is necessary to create spaces to which foreign investors can go for guidance on their tax obligations. Since Law 113 was passed, with some changes that are competent to them, they have expressed great uncertainty and have been waiting for new resolutions to clarify certain points in their obligations.