CUBA STANDARD — Hoping to boost lagging GDP growth after three years of economic reform, on March 29 the National Assembly approved a new foreign investment law that promises less government control, more flexibility — including 100-percent ownership by foreigners — lower taxes, and more guarantees to foreign investors.
The Cuban economy needs more than $2 billion in foreign investment every year in order to achieve a necessary 7% growth rate, Marino Murillo, chief coordinator of reforms, told the Assembly in its extraordinary session at the Palacio de Convenciones in Havana.
Foreign investment is not only “the most expeditious option” but also “the last opportunity of the reform to move growth closer to the goal” for the five-year period that ends in 2016, said former Central Bank economist Pavel Vidal in a recent Cuba Standard Economic Report. The government has missed its investment goals by an average 20% over the past four years, according to Vidal.
The foreign investment law now allows investors to set up 100-percent foreign-owned companies on the island as well as joint ventures and operating agreements with privately owned cooperatives, in addition to joint ventures and operating agreements with state companies. (see ‘Key Features’ list below)
While the law itself sets the tone, it is the specifics and execution that will make the music. The text of the law, consisting of 34 general principles and 11 segments about different economic sectors, will not be published until the end of June when the law becomes effective, according to a summary of the draft bill that circulated in the days before the vote.
Unlike its predecessor — Law 77 of 1995 — the new foreign investment law will be accompanied by a body of regulations that the Council of Ministers will put together within 90 days.
“Depending on what they look like, the regulations will reduce the amount of discretion” by politicians and bureaucrats, said Gerardo Arreola, a veteran correspondent who covered Cuba in the 1990s and 2000’s. “Maybe they will end the era in which a business in Cuba was negotiated during months and months of dinners and lunches,” he added, referring to lengthy approval processes that often ended with no decision — or at least no notification — at all.
The new law obliges the government to notify foreign investors within 60 days whether their application has been approved or denied.
But it is the execution that will make the biggest difference.
“In the end, I think the problem continues to be the same,” Arreola said. “It’s not the fine print that matters most, but what is written with ‘invisible ink’. The question is whether [the government] decided to finally apply the same clear and defined rules for everyone.”
Repatriation of profits, arbitration, and hiring — historically through a state agency that only passes on a fraction of the pay to the worker — were apparently the biggest areas of concern among Cuban decisionmakers.
Trying to drive the point across that the National Assembly of Popular Power — long seen as a rubber stamp for executive decisions — took its work seriously, the legislators “definitely decided the upper and lower case of this law,” official daily Juventud Rebelde said. After a two-week vetting process in two parliamentary committees and five meetings throughout the country, involving more than 560 deputies as well as dozens of experts, seven amendments were made before the bill passed, according to the newspaper. None of the official media specified the concerns and changes. One legislator, shown in a state TV newscast after the vote, pointed out how “democratic” the new approach was.
Rather than reporting about the controversial issues directly (the proceedings of the extraordinary session of the parliament happened behind closed doors), some official media used reader feedback to hint what the most controversial points were. One letter-to-the-editor writer published by Granma a day before the vote urged the parliament to eliminate the section of the law that forces foreign companies to hire through a state agency, claiming that this “only serves to create bureaucracy and corruption” and scares away investors.
Even so, the new law still forces foreign investors to hire all employees, except top executives, through an entity “proposed by the [Ministry of Foreign Trade and Investment] and authorized by the Ministry of Labor and Social Security,” according to Juventud Rebelde.
Salaries will be determined “by mutual agreement between joint ventures and the employment entity, without mediation by third parties, as has been the case until now,” the newspaper said. The agency is a “facilitator” rather than a collector of fees, retaining only a “small part” of salaries to fund its own operations. According to the newspaper, this was a change the parliament added to the law.
Key features of the new foreign investment law:
•Foreign investment is allowed in all sectors. Excluded are health and education services to the people, and the armed forces, except their businesses.
•The new law obliges the government to notify foreign investors within 60 days whether their application has been approved or denied.
•Investments can be made either under joint ventures with state companies, international economic associations (such as risk contracts in oil and gas or mining, production agreements in agriculture and manufacturing, agreements for professional services and construction, and hotel administration contracts), or under 100-percent foreign-owned enterprises.
•Foreigners may partner with state companies and member-owned cooperatives, but not with privately owned businesses.
•Foreigners may invest indirectly in joint ventures or fully foreign-owned company by buying shares.
•Foreigners may buy real estate, including residences and buildings dedicated to housing, tourism and offices, or invest in real estate developments used for tourism.
•No property will be confiscated, except in “cases of national interest,” as defined by the Council of Ministers, and “in concordance with international treaties” and due indemnization.
•Foreign investors may sell all or part of their shares to their Cuban partners or other investors. The value of the shares will be determined by the partners; in case of discrepancies, the value will be determined by an international valuation agency authorized by the Ministry of Finance and Prices.
•The government guarantees the free transfer abroad of profits and dividends, as well as of amounts from a sale, without taxes or other dues.
•Foreign investors must continue to hire workers through a state agency. Hovever, salaries are “negotiated” between the investor and the agency, and the Foreign Trade and Investment Ministry may allow foreign companies to set up a ‘stimulus fund’ to grant additional rewards to well-performing employees.
•All joint ventures and foreign companies may now import supplies directly, without having to use a state import agency.
•15-percent corporate tax rate on net income, half of the previous rate.
•During the first eight years, all foreign joint ventures and international economic association contracts are exempt from profit taxes. The Council of Ministers may extend that period from case to case. Beyond eight years, all profits a company reinvests in Cuba are tax exempt.
•Personal income tax exemption for foreign investors on profits or dividends from joint ventures or international economic association contracts.
•Extractive enterprises, such as in oil or mining, have to pay profit taxes of up to 50%, depending on the Council of Minister’s decision.
•The Council of Ministers may also grant foreign enterprises rebates of up to 50% on other taxes.
•The Council of State is exclusively in charge of making decisions regarding oil and mining concessions, as well as concessions for public services such as transportation, telecommunications, water or electricity, and construction of public infrastructure. The Council of Ministers and the Foreign Trade and Investment Ministry take other decisions. It isn’t clear whether provincial governments or other entities will be permitted to negotiate and approve foreign investments.
•The Ministry of Science, Technology and Environment (CITMA) will play a crucial role in each investment approval process. The Ministry of Foreign Trade and Investment will pass all applications to the environment ministry to have them vetted for implications regarding “technology transfer, environmental conservation, and rational use of natural resources.”
•Investors are responsible to repair environmental damage, either by remediation or paying the cost.