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    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

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