Cuba's foreign investment invitation may hide potholes

Cuba's foreign investment invitation may hide potholes
Michelle Caruso-Cabrera | @MCaruso_Cabrera
Thursday, 27 Mar 2014 | 6:43 AM ET

Cuba is expected to approve a new law that in theory will draw more
foreign investment to the socialist country. But in practice, critics
argue, it will be insufficient to assuage investor concerns about their
money.

According to the proposed law, a copy of which has been seen by NBC
News, fully foreign-owned firms will be permitted, and taxes will be
either lowered or eliminated for some time. Additionally the taxes will
be streamlined to cover net income rather than labor.

Washington attorney Jason Poblete says Cuba still lacks two of the
bedrocks of investing: rule of law, and protection of property rights.

"You need a stable legal system that protects investor rights and has a
path to resolve disputes," said Poblete, who represents American clients
with claims against Cuba stemming from the mass nationalization of
private property in the early 1960s, after Fidel Castro took control of
the island in a 1959 coup d'etat.

Fully foreign-owned firms

Theoretically, fully foreign-owned businesses have been permitted, but
were never actually approved. Until now, the government insisted on
joint ventures, in which they were the controlling partner with a more
than 50 percent stake. Inability to control an investment has been a
large hurdle to foreign direct investment.

In private conversations in recent years, government officials told CNBC
this would change when the new law was implemented. It remains to be
seen whether or not they will actually allow it to occur.

The law also seeks to dramatically lower taxes. Currently, the few
foreign firms doing business in joint ventures with the government must
pay taxes of 30 percent on all profits and 20 percent on labor. Under
the proposal, the mining profit tax will drop to 22.5 percent from 45
percent. The labor tax would be eliminated and the tax on profits will
drop to 15 percent.

The Cuban parliament will vote on the proposed new foreign investment
law Saturday.

Cuban exiles yes, Cubans no

One provision says Cuban exiles may invest, but Cubans living in Cuba
cannot.

It's not atypical for the Cuban government to create regulations that
treat Cubans differently than non-Cubans. For example, Cubans who live
in Cuba are prohibited from entering certain hotels and restaurants
where foreign tourists are permitted to stay. Poblete says the new law
enshrines "investment apartheid like their tourism apartheid."

Ted Henken of Baruch College sees great irony in the clause: "It creates
second-class economic citizenship compared to the 'evil exiles.'"

Henken believes the clause is designed to incentivize Cuban exiles to
lobby the United States for an end to the embargo. Right now, even if
Cuba allows exiles to invest, the United States prohibits its citizens
from doing any business in Cuba. And while exiles are allowed to send
money to their relatives on the island, the structure of the U.S. law
means that money can't be used to invest. The U.S. started its embargo
against Cuba more than 50 years ago in protest of Castro's communist
polices.

Outstanding claims a problem

Another hurdle is the issue of outstanding claims against the island.
There are still billions of dollars in outstanding claims from the early
1960s when Castro seized every business in the country, eliminated
private property and decided that every citizen would work for the
government. One of the clauses in the U.S. embargo is that outstanding
claims held by American citizens must be resolved.

Poblete says when his firm learns of a foreign company trafficking in or
on a disputed property, he files a claim with the U.S. government.
"What's the European investor going to think? Do I want to fight off the
U.S. State Department?"

Why now?

Since 2010, the Cuban government has made incremental economic reforms.
For example, in certain categories of employment, individuals are now
allowed to work for themselves and not the government. The pace of
reforms increased in the past year, when the government announced
employees could take over failing government operations in certain
categories such as transportation, and try to make a profit, which they
then would split with the government 50-50.

Henken believes it has to do with the unrest and instability in another
socialist Latin American country. "They can't rely on Venezuela for
their ace in the hole," he said. The oil-producing, OPEC nation provides
more than 100,000 barrels of deeply discounted oil per day to Cuba. It's
a crucial subsidy that keeps the lights on and cars on the road. But
recent unrest in Venezuela raises questions about its stability and the
long-term viability of the oil handout.

—By CNBC's Michelle Caruso-Cabrera.

Source: Cuba's foreign investment invitation may hide potholes -
http://www.cnbc.com/id/101531473