Europeans on Cuba’s foreign investment regime

[July 2002 statement by EU embassies in Havana]

The Legal and Administrative Framework for Foreign Trade and Investment By European Companies in Cuba

Since Cuba began to decentralize its foreign trade and allow foreign investment, European companies have been its principal economic partner. They provide a large proportion of the products, the financing and the technology which the country requires and generate a very large proportion of the income from exports and tax revenues. Their commitment to the development of the island is a long term one since they wish to continue to help it to integrate itself with the rest of the world and to modernize its system of production. In this commitment and objective, the Embassies of the Member States of the European Union support them as a demonstration of our Government’s interest in Cuba and in its future.

The Programme of Co-operation between Cuba and the European Union emphasizes these aspects of economic modernization, improvements in management and internationalization of the Cuban economy. (For the time being it does this with technical and in anticipation of more ambitious programmes which would be available as progress is made in these processes.)

European good intentions will result in major mutual benefits the more secure and reliable the legal framework which is established so that joint and foreign firms create wealth, employment and exports and spread new technologies. The advantages for both parties will also increase if the legal framework results in an operating cost competitive with that of other countries in the region. Cuba’s comparative advantages, centred more on the quality than on the price of its human capital, should not be eroded by excessive overheads and by unnecessary difficulties and obstacles.

The European companies have expounded to the Economic and Commercial Advisers their experience of a legal framework which should improve in order to attract new investments and ensure that current ones prosper and expand their activities. On the basis of the compilation and analysis of the difficulties which have been reported, this working document has been prepared and it includes, after this statement of objectives, an analysis of general aspects and sections devoted to the six spheres in which most problems have been reported. On this basis, we propose a frank, constructive and respectful dialogue with the Cuban government based on better information concerning these topics and which will explore the form, the talking partners, and the time limits in which they can be solved.

These are questions relating to the rules on economic activity in general, and on foreign trade and foreign investment in particular, where we believe that the situation can be improved without affecting the consistency of the main lines of economic policy. The majority of these problems increase companies’ operating costs, and this increases import costs for the Cuban economy and/or slows the development of joint companies. A reduction in some of these costs will result in greater economic growth, an increase in the tax base and total takings, while the competitiveness of firms and of the country in general will improve.

Some General Principles

For European investors it is essential to have greater judicial security and a stable, transparent and reliable legal framework. The rules must be published and circulated and the editions of the Gaceta Oficial [Official Gazette] must be available with greater regularity and the decisions of the Council of Ministers should be circulated more widely. (Communicating them to the Embassies could be one provisional mechanism for increasing diffusion.) Some European companies find it difficult to learn about some lower level legal decisions in time. At other times, decrees, circulars and other rules which have scarcely been published are applied to them and their application gives rise to fines and cases of lack of a proper legal defence. Normally the Administration is given a large margin of discretion in the granting of licences and in the taking of economic decisions. There should be greater respect for the conditions under which an investment is agreed, without alterations being made because of changes in the political or economic context and without them being subject to requirements which are difficult to meet.

The practical application of some provisions of the economic legislation is not uniform and offers advantages to some firms over others, generally to Cuban over joint ones, with the result that there are distortions in costs when there is unfair competition between firms. In this matter, experiences of foreign firms are very varied. While some entrepreneurs, on the basis of their negotiating capacity, are given some gestions, it seems that less help is given to the smaller ones. It is very common to require foreign firms to produce proofs and guarantees of their legitimacy and solvency which presuppose not inconsiderable costs, while foreign firms can rarely ask the Cuban party for similar guarantees. The high cost monopoly system in which public services to firms operate (from communications to legal services, accounting, etc.) and the retail distribution channels also damage foreign firms who suffer high costs or are forced to charge selling prices which are too low.

In a modern and competitive economy, as the one which is being built in Cuba, the control of legality and of the use of public resources should not prevent a certain flexibility so that managers can use the firm’s resources in an efficient manner. An excess of controls and inspections may result in exasperating interventionism and convert entrepreneurial activity into a task where more energy is required to complete the most detailed formal aspects of the regulations than to produce efficiently. We believe that firms can be better helped to carry out their productive vocation by releasing them from some rigidities and from the pressures of so many stern inspections. Inspections are mechanisms for ensuring that rules are complied with, but an excess of them can be counterproductive. It will be more useful to help firms to comply with the rules than to prosecute them. Punishments may serve to guarantee the application of the law but should not be used as a mechanism for collecting taxes.

Another manifestation of public interventionism is the application to joint firms of directives issued for Cuban ones and which are manifested by pressure from the local partner in forms which damage the business plan or the development of the firm. While the laws and decrees are understood to apply generally to all firms, the joint ones should not be subject to political guidelines in the same way as the Cuban ones are. These guidelines can only be applied to the joint firms partially and by consent of their management bodies.

Authorisations for Subsidiaries and Joint Firm Deals

Join firm deals should be easier and clearer. Save for priority deals there is too much delay because the negotiators are not always in a position to decide, they do not know every aspect of the tax law, or they change frequently; because of the differences in opinion between the local partner, the supervisory ministry and Minvec; because sometimes part of the deal which has been concluded with one of these bodies has to be revised with another one; because there is not a clearly defined strategy for the development of certain sectors or products, as in the case of sectors where contradictory concessions or authorizations are given; or because there is no agreement on the contributions to be made by the partners or on the costs of the joint firm, especially when the foreign partner is a small or medium-sized firm.

In the running of firms, agreements between partners are not respected in the same way by both parties. The Cuban partner is usually at one and the same time a firm, the Ministry supervising and regulating the activity and representative of the State, who sets the general conditions of the entrepreneurial activity. It has a great influence and indirect power over the joint firm and should be able to facilitate its development more. The interests and strategic objectives of the two partners often do not coincide and this results in artificial associations and in lack of clarity in the development of the firm.

In the case of collaborative productions, cases of difficulties have been reported when it comes to evaluating the contribution of each one of the parties, and serious difficulties have been reported in settling results since the Cuban partner frequently does not distinguish between income and expenditure imputable to the collaborative activity and the general activities of the firm with the result that it has difficulties paying the foreign partner its share.

The subsidiaries of foreign firms suffer from restrictions on their activity which make it difficult for them to develop and which increase their costs. Among these is the ban on transporting and distributing their own products, activities which they have to subcontract at high cost and with a shortage of available service, and this redounds not only in difficulties for them but also in high costs for the country’s imports and exports.

The regulation on subsidiaries (Decree 550/2001) attempts to modernize and put the sector into order but at the same time results in some theoretical and other practical difficulties. The requirement for a minimum invoicing of 500,000 $ appears to be very rigid and does not meet what is really required. The requirement for minimal company capital forces individual entrepreneurs to form companies and have them audited. The guarantees that these measures claim to give can be found by other less costly means. Trust is put in the flexible application of these measures the current drafting of which adds to the administrative discretion which rules in this sphere and of which the delays in deciding on requests for a subsidiary are an example: in some cases these are protracted far beyond the stipulated six months.

The granting of import licenses by customs sections instead of items is a very positive step. It is hoped that one will be told the process by which firms which had old licenses can alter their classification. However, it is considered that the deadline given for presentation of the annual sales reports (before 31 January of each year) is excessively tight for many firms.

Customs, Imports, Customs Warehouses and Free-Trade Zones

The running of the General Customs of the Republic is perceived as being good apart from some practical problems. A large proportion of the difficulties reported are of a practical type and related to the behaviour of customs officers and importers.

The practical difficulties in Customs relate to cases such as the following: once a produce has been imported into the country and its duty paid, the Customs does not agree to cancel the operation when, for various reasons, the customer suddenly decides not to take possession of the goods. A situation then arises where he does not know what to do with the goods. Similar situations arise in the case of losses, breakages, goods to be returned under guarantee, goods past their expiry date, thefts of goods, etc. The consignments which are received by courier (DHL and similar) have to be dealt with by a customs agent who applies his minimum charge (some $60) even for consignments of little value or for simple catalogues or samples. Samples of no commercial value cannot be accorded a value of more than $20. The consideration of whether a given consignment is accepted within that value declared depends on the opinion of the customs officer. Similar problems have sometimes arisen for goods intended for tastings, promotions and demonstrations, practices which are customary internationally in many sectors and products, but which run into great difficulty in Cuba. A special problem arises on the occasion of Fairs for which products to be exhibited or used in promotions are submitted to excessively complex and rigorous procedures.

The deadline given for collection of containers from the port is very tight and results in frequent cases of confiscation and assignment to MINCIN, a circumstance which means that sales by auction of confiscated stock are frequent and distort the market.

There is also discrimination between Cuban and joint firms for differences in treatment in customs policy: in some cases because some priority firms are exempt from customs, in other cases because they pay duty in national currency while the joint firms have to pay them in dollars.

Importers on someone else’s account, apart from honourable exceptions, appear to be more inconvenient middlemen than an efficient element of the system. In many cases they slow down the process since the majority do not have the resources for carrying out their work, so that the vendor and the purchaser often have to carry out part of the procedures. When the importer has problems with the ship-owner or the Container Terminal, the import operation is blocked. There have been cases where the equipment which was imported by one client has been diverted to another. Because of this the commission which they charge is barely justified and does nothing but make the final price higher. In some cases they complicate the system of payments and increase delays with the latter. When payments are made at different times, the importer can be charged his commission from the first payment. The lack of flexibility of the system is manifested in the case of imports or urgent goods, such as spares, since the system for picking up the goods makes difficult, delays, and increases the costs of those operations, generally for small sums. This generates a high cost because machinery is paralysed for many firms, both joint and Cuban.

Bids for public contracts for purchases are an attempt to improve public purchases the success of which is not guaranteed. There is a dearth of information among possible bidders concerning the system in general and concerning specific purchases for which bids are sought. The Contract Committees have not yet developed the administrative practice of public contracts open to competitive bids where not only price but also quality and post-sales service are influential. The records of suppliers which Cuban importers have to maintain are an effort to obtain the best possible prices but, in practice, they may be of little use. In some cases they may even become an obstacle to trade and be counterproductive since some of these importers ask potential suppliers for a lot of information and formal certificates which sometimes one has to take personally to Havana. The high cost of these procedures dissuades possible suppliers from fulfilling these requests before starting initial contacts on a hypothetical business relationship.

Some firms established in a Free-Trade Zone do not always comply with the obligation not to sell on the national market more than 25% of their turnover (both goods and services) because there are means of getting round this restriction. This means unfair competition for those established outside of them which bear much higher overheads and taxes. Whether sales to the diplomatic corps are included in this percentage or not is not clear. Rigidities in the interpretation of the law in this respect are frequent. For example, companies established in customs warehouses are not allowed to store in the part of the store which they have contracted goods which they own but which are not the essential object of the activity, as for example furniture for assembling their stand at the Fairs.

Residence and Work Permits, Visas, Motor Vehicles

Obtaining work and residence permits and also exit visas for residents is a serious problem which requires the use of time which has to be diverted from the firm’s normal activity. It also involves not inconsiderable costs. It is tedious that these permits have to be renewed every year and separately. It would in fact appear to be more reasonable to institute a system of permits valid for a number of years and which are negotiated and issued at the same time. Multiple exit visas should form part of these permits. At the moment they are only issued to a small number of senior foreign executives while many others, and the members of their families, have had serious difficulty in leaving the country, even in cases where there are personal or professional emergency situations in which travel visas are not always issued.

The requirement of a commercial visa for businessmen and technicians is an obstacle because very little is known about the existence of this type of visa, and this inclines many people to believe that they can come on a tourist visa. In addition problems arise because of their cost and, above all, for the delays in the Cuban consulates in Europe in issuing them.

The frequent problems associated with the possession of motor vehicles are very tedious and result in high costs, not only for the initial importation but for maintaining them and keeping them secure. Renewals of motor vehicle licences both of executives and of the firm itself and the limitations which apply to them appear excessive. The renewal of driving licenses for personal vehicles should be done on a multiannual basis, coinciding with the residence and work permits, avoiding periods when one cannot move around because of lack of documentation. Company vehicles should be freely available to the firm with no restriction on their use to an artificially established working hours.

Labour Aspects

The numerous general and specific difficulties in this sphere put up the price of the labour force to a point which make them a major hinderance to greater flows of foreign investment, especially in activities related to exports. The following have been pointed out as specific questions.

The rates approved for subsidiaries are considered minimal, as there are Employment Agencies which try to apply higher rates. The rates granted in joint and co-operative firm negotiations are not always respected, and this damages the viability of some entrepreneurial projects. Various agencies insist on upgrading professional categories (storekeeper to head of store). Others prohibit a worker contracted for one function from carrying out another similar one or from moving for professional reasons to another work centre of the same firm. Cuban personnel, even in the management category, are often not allowed to represent and sign contracts on behalf of the subsidiary, which undermines the right of the latter to be represented by someone whom it considers trustworthy.

Staff are defined quite rigidly and it is then very difficult to adapt them to entrepreneurial circumstances. While some agencies do not agree to contracts for part-time staff, others force the contracting of a minimum number of staff (the Free-Trade Zone Office imposes a minimum of five people and three Cubans per foreigner) even when the structure of the firm does not require them. In any case, the system of staff selection is controlled by the employment agencies who try to impose their candidates (frequently not suitable professionally) and make it difficult to hire candidates identified by the foreign partner. They can withdraw a worker at any time, even against the partner’s wishes, which is extremely harmful when time and resources have been invested in his specific training.

The difficulties and recent restrictions in the incentives system for the labour force and in the tax system for those costs are leading to increasing difficulties in hiring staff and improving the productivity of the firms. The growing black economy appears to offer better conditions than joint firms, even those focused on exports of goods or services. Wage conditions should be able to adapt better to the possibilities and needs of each firm and serve as a tool of company management rather than an instrument of social policy in the service of the authorities.

In the case of a fitting and justified dismissal, the Employment Agency for subsidiaries requires that it be compensated for the entire working life of the worker. This is not reasonable since these are justified dismissals. In the case of an unjustified dismissal it would be the Employment Agency who should pay compensation if appropriate since the worker, although providing his services for a subsidiary, is in reality employed by the Agency which has to take responsibility for the appropriate compensation.

Tax Aspects

The taxation system is perceived as in need of modernization which would make it more transparent, fair and efficient and in order to promote foreign investment, especially in activities related to exports. There is also a lack of an information service for the taxpayer which would clarify the numerous doubts and ambiguities which arise on the application of taxes.

There are various taxes of which the design could be improved and numerous fiscal and parafiscal fees which complicate company management and increase the costs of joint firms, which have to pay them in dollars while Cuban firms pay them in Cuban pesos. Finally, the tax authority interprets the rules very strictly and introduces more difficulties in the fulfillment of tax obligations and this results in numerous penalties appeals against which will have results which are not consistent with case law and which add a further feeling of judicial insecurity.

Some taxes and fees appear very difficult to understand in a modern economy. For example the fee for advertising which affects mere cards advertising the plant of a firm as a function of its area. The fee for fire protection services does not appear to be easy to understand either, nor is the high charge to hotels for rights to perform music.

The tax on entrepreneurial utilities is very strict in determining what expenses are deductible: incentives to staff or social or formal care for workers, the subsistence allowances to personnel moved out of the work centre are analysed with excessive detail to ensure they do not exceed the very low limits test. The initial agreements on customs exemptions both for capital goods and for raw material are not always respected since the Ministry of Finances refuses applications for changes of criteria with respect to the initial agreements which it authorized and/or is very slow in responding to applications for exemptions, and this sometimes forces firms to import and pay duty rather than incur delays which are more costly than the duty. The rule on the right to import office material once a year is not clear or well known either.

There are no tax incentives to reinvestment of profits and Cuban partners often prefer to distribute dividends, thus slowing down future opportunities for the firm. Nor is there any incentive to export, an activity which is slowed by the high operating costs and by the lack of incentive to carry out promotional activities on foreign markets. A small example of this is that the maximum subsistence allowance acceptable taxwise for a Cuban executive transferred abroad is 22 $.

Then there is the tax which is borne by all sales on the spot of firm with customs warehouses, even for those not recovered, while there is no known system for deducting them.

Financial System and Methods of Payment/Charging

The financial system suffers from some deficiencies, especially in relation to joint firms which it virtually never finances. The banks and finance houses offer insufficient and poor added value services for their high charges. For example they do not issue documentary letters of credit except at very-high cost and with high guarantees. Some banks require unrewarded minimum balances of 10,000 $ and no bank pays for accounts, charging instead numberless commissions and costs. Banking competition is also hampered by the practice of making it difficult to open accounts in a second or third bank, with the intention of assigning each client to one bank.

There is no clearly defined procedure for handling bills of exchange: although it is established that this can be done in the provincial economic courts, in practice debtors try to use the arbitration system, which is neither the most efficient nor the cheapest for these cases. Claims by a foreigner for debts do not obtain the freezing of the accounts of a Cuban firm while this is done in the case of a foreigner’s debts to a Cuban firm.

In co-signed contracts the co-signers very frequently do not respect the terms agreed and apply the cash arising from the sales of goods to necessities other than payment to the co-signer.

The difficulties of state firms in meeting their payment obligations are seriously threatening some firms and increasing the risk premia which all operators have to pay for their operations with Cuba.

The supposed financial decentralization does not work in practice at times of difficulty since the finance houses drain funds from the most solvent firms in their sector to cope with the needs of the least solvent, in such a way that the whole sector is beginning to suffer arrears. Finally the State has to turn to the healthiest finance houses in order to meet the most urgent payments or those with political priority.