Oil Report

Cuba allows foreign firms to pay in hard currency

HAVANA, Dec 7 (Reuters) - Cuba on Friday said it will allow foreign companies to pay Cuban employees with hard currency, a move that legalizes widespread “under the table” payments and requires workers to declare and pay tax on that income.

Representatives of 698 foreign companies registered with Cuba’s Chamber of Commerce were told by Finance Ministry officials this week that as of Jan. 1, 2008, they must also record in their books all hard currency payments to staff.

Foreign businesses in communist Cuba employ staff through government agencies, which are paid in hard currency and, in turn, pay the employees in Cuban pesos worth 24 times less.

To supplement low wages, companies often pay Cuban staff an additional amount under the table in hard currency, and authorities have turned a blind eye, until now.

“This will normalize relations between foreign investors and Cuba,” said Foreign Investment Minister Marta Lomas.

“Cuban workers receive their salary in pesos, and it is known that they receive another payment. We are adjusting the taxes to the circumstances,” she said.

Multinational companies have long urged Cuba to allow hard currency payments, and joint ventures between foreign firms and the state already pay results-based bonuses to some Cuban staff in hard currency, about $30 a month on average.

“This will allow us to legally pay all our workers in hard currency,” said a manager of a major foreign company in Cuba. “The bonus is, in effect, a wage.”

Cuba wants to make the hidden payments above-board so that they can be taxed, said another foreign businessman.

Western diplomats said allowing foreign companies to pay in hard currency was a break with Cuba’s egalitarian socialist system, and attributed the change to the less ideological rule of acting President Raul Castro, who took over when his elder brother Fidel Castro fell ill 16 months ago.

“This recognizes that some people are more equal than others in Cuba,” said one diplomat.

Cubans have lived virtually free of taxes for three decades, so for many of those employed by foreign companies, filing annual income tax returns will come as a shock.

The National Tax Office was set up in 1995 and the next year began taxing the hard currency income of self-employed Cubans, mainly family restaurants known as “paladares,” the closest thing to a small private business in Cuba.

Their taxes must be paid in hard currency according to a scale that rises as high as 40 percent. (Reporting by Anthony Boadle and Esteban Israel; Edited by Xavier Briand)