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IS IT TIME TO INVEST IN CUBA?

With the slowly thawing of U.S. – Cuban relationships, the prospect of doing business in Cuba becomes more attractive, however a lifting of the U.S. embargo would signal real change.

June 2015

The U.S. removed Cuba from the list of governments sponsoring terrorism at the end of May after more than 33 years. However, the embargo enacted by the administration of President John F. Kennedy in 1982 remains.

When the countries of Central and Eastern Europe became democracies after 1989 and the Soviet Union was dissolved in 1991, it seemed that Cuba too might be brought in from the cold.

But while Cuba lost its main source of military and financial support with the end of the Soviet Union, its internal and external policies did not change, and the fading of the Cold War didn’t end the embargo.

In the later 1990s and especially in the new century, companies from some European countries led by Spain began conducting business in Cuba although the embargo made banking difficult if not impossible. Faced with the choice of doing business in Cuba or doing business in the U.S., few chose Cuba.

However, in the U.S. and elsewhere some people began advocating for the end of the embargo, and more and more Americans began visiting Cuba. Although it was impossible to board a scheduled flight in the U.S. and land in Havana, chartered flights were possible as was flying via a third country, often Canada but also Mexico and Spain.

In 2001 the Cuba Study Group was established by some business people of Cuban origin who thought it was time for a new approach “based on strategic thinking, not reflexive reactions,” according to Tomas Bilbao, its Executive Director.

They began by polling Cubans in the U.S. and found that “the new generation had new attitudes” toward Cuba. By 2005 when Bilbao was hired, the focus of Cuba Study Group was “to help develop civil society in Cuba.”

The Group’s Small Business Initiative led to the Cuba Entrepreneurial Exchange, bringing Cuban entrepreneurs to Miami to expose them to similar businesses. The first group – all women – visited in July 2014.

In May this year four Cuban entrepreneurs – makers who produce and sell physical products – took part in the annual eMerge technology conference in Miami. A second group of chefs will link up with Florida restaurants in August.

These entrepreneurs testify to the Cuban government’s need to find employment for people who lost theirs in 1997 when major cutbacks reduced the number of government jobs, and many of the newly unemployed started small businesses.

They were helped by the Catholic Church’s support of the Cuba Emprende program to train potential entrepreneurs in how to open and run a business. The program offers 80 hours of instruction in business basics and includes an incubator and an accelerator. At least 1,700 people have graduated from the Emprende program so far, but progress toward a more entrepreneurial economy in Cuba is not going to happen fast.

Doing business in Cuba

The 500,000 self-employed people represent 8% of the 11.3 million population, according to statistics from the National Office of Statistics (ONEI) cited by Saira Pons Perez of the University of Havana in her recent study, Tax Law Dilemmas for Self-Employed Workers.

The self-employed are responsible for 5 percent of GDP. Tax policy keeps the number of entrepreneurs down and limits growth of their companies. As a result, there is much tax evasion despite severe penalties for non-payment.

Entrepreneurs are taxed as individuals who cannot deduct business expenses. They pay no labour tax on up to 5 employees. Beyond that, the tax jumps abruptly: for 6-10 employees, 150 percent of the average wage in the province where the business is located; for 11-15, 200 percent; more than 16 employees, 300 percent.

The two biggest problems for Cuban entrepreneurs and foreigners who would like to do business in Cuba are currency and banking. Like the countries of the Soviet bloc after World War II and until 1989, Cuba has two currencies. Then, there was the official exchange rate and the black market rate, actually the real currency.

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