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HAVANA (Reuters) - Cuba unveiled on Friday a new tax code it said was friendlier for small business, signaling authorities are serious about building a larger private sector within the state-dominated economy.
The new system, outlined in the Communist Party daily Granma, greatly increases tax deductions, but also adds taxes and comes with a warning of stiffer enforcement of tax collection.
It replaces a rudimentary tax code in place since 1994 when some self-employment was first authorized but then squeezed by severe regulation.
The tax redesign comes as the government has begun slashing 500,000 workers from state payrolls and preparing to issue 250,000 self-employment licenses to create new jobs in President Raul Castro's biggest reform since taking office in 2008.
He promised economic change when he replaced ailing older brother Fidel Castro and is pushing to boost productivity to help the Caribbean island's troubled economy.
There were just 143,000 self-employed in 2009, according to official figures.
The new tax system enables the self-employed to deduct up to 40 percent from income for the cost of supplies, compared to just 10 percent under the old one.
Formerly, small businesses simply paid a graduated income tax. Now they will also have to pay a 10 percent sales tax and 25 percent social security tax, but both are deductible at the end of the year.
Castro's reform permits the self-employed, for the first time, to hire workers. They will have to pay a 25 percent social security tax for each employee, which will also be deductible, and an undefined labor tax.
The Granma story made clear that despite the development of a larger private sector, the government's socialist philosophy remains in place and the labor tax is a way of enforcing it.
"This tax is regulatory in character to avoid concentrations of wealth and indiscriminate use of labor," Granma said.
"The more labor hired the more severe the tax," it said, without providing details.
The Granma story warned that those who are illegally self-employed must obtain a license and said tax scofflaws would face legal action.
"Those who continue working on their own without papers, or do not pay the required taxes, will feel the weight of the law imposed upon them by those mandated to enforce it, the National Tax Office," it said.
Cuba expert Phil Peters at the Lexington Institute in Arlington, Virginia said the new code is an attempt to simplify taxes for small businesses and make sure those taxes are paid.
"My bet is that the sector will grow substantially, but only time will tell how big a tax burden this will be and how many entrepreneurs will be able to live with it," he told Reuters.
The government, which took power in put in a 1959 revolution headed by Fidel Castro, controls about 90 percent of the Cuban economy.
Most small businesses remained in private hands until 1968 when they were all nationalized, down to the shoe shine shops.
The reforms, announced last month, turn back the clock to some degree on the sweeping nationalization.
Along with being able to hire employees, the self-employed will for the first time be able to do business with the state, open bank accounts, receive credits and rent space.
The goal of these changes, Granma said in a story last month, was to "distance ourselves from those conceptions that condemned self-employment almost to extinction and stigmatized those who decided to join it, legally, in the 1990's."
At present, more than 85 percent of the Cuban labor force, or over 5 million people, works for the state, many in unproductive jobs. The government has said it ultimately plans to cut a total of one million state workers, or 20 percent, from state payrolls.
Along with private sector development, many state-owned retail operations will be converted to employee-run cooperatives and leasing arrangements the government said.
Editing by Jeff Franks and Jerry Norton