It turns out Cuba actually needs the rest of the world

March 28, 2014
March 28, 2014

Cuba is warming up to capitalism.

The country’s National Assembly is set to approve a piece of landmark legislation over the weekend that will slash the country’s tax on foreign companies’ corporate profits in half, to 15%, and allow them to withhold those tax payments for as long as eight years, local news outlet Juventud Rebelde first reported on Wednesday (link in Spanish).

The new corporate profits tax will actually be a good deal lower than that of most every other industrialized country in the Organization for Economic Cooperation and Development, including the US, where the corporate income tax rate is 39%. The law will span every sector, aside from health care and education, which is prohibited from privatization by the country’s constitution. The foreign investment law, as it has become known, doesn’t change Cuban laws that limit foreign ownership of property to 49%, requiring that the other 51% remain controlled by the state. But it is specifically designed to help lure private foreign businesses to participate in the Cuban economy.

“This is the first time in decades that the Cuban government has opened its doors,” Christopher Sabatini, senior director at the Americas Society and Council of the Americas, told Quartz. “In many ways, it’s a very direct philosophical challenge to the very foundations of the revolution.” Cuba last pivoted in the direction of capitalism when it lowered the corporate profits tax for foreign firms to 30% in 1995.

The current shift signals something we’ve known for quite a while now: Cuba is broke, and the 30% rate wasn’t enough to attract the foreign cash it desperately needs. The Cuban Revolution, which ended in 1959, led to Fidel Castro’s decades-long reign over the Cuban socialist state, but a spiraling economy and impoverished population has forced the country’s hand. Since Fidel’s brother, Raul, assumed power in 2008, he has hinted at the need for reform. But that reform has been slow, and the Cuban populous is growing impatient. Not only is the country suffering from a severe housing shortage, but the poverty rate now stands at approximately 26%.

Until now, that is. The new law will not, at least immediately, affect the US—since its embargo on economic ties with Cuba still persists, prohibiting American companies from doing business there. But it’s a big deal for virtually every other country—especially those interested in expanding their foothold in the Cuban economy ahead of its slow but sure exit from insularity. It’s a longer-term bet, but there’s an expectation among foreign companies that even the US embargo is likely to be lifted sooner or later, according to Sabatini.

Still, some obstacles persist. For one, there remains a hefty 20% labor tax for foreign firms, which will make it difficult to efficiently hire workers in the country. And there remains the possibility that Cuba’s government isn’t as serious about opening up its economy as the legislation suggests. The law, after all, will only apply to what are called mixed companies—that is, firms either Cuban but foreign-owned, or Cuban but funded entirely with foreign capital. And there’s plenty of skepticism about how much the new legislation will actually change structurally. The devil will be in the details—that is, the law’s actual implementation.

But change is at least becoming more than just a talking point, and that’s pretty encouraging news for the 11-plus million people living on the island. “There are people in the bureaucracy who find it threatening, because it makes it more difficult for them to keep control,” Sarah Stephens, the executive director of the Center for Democracy in the Americas, said. “But Cubans on the street are happy to see these restrictions lifted. Instead of planning for their eventual escape, they’re now starting to envision a successful life at home, in Cuba.”

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