MODIFIED REGULATIONS OF CUBAN PROFITS TAX LAW By Commercial Attache Albert F. Nufer, Habana Decree No. 1117 of May 15, 1939, promulgated in Official Gazette No. 352 of May 31, 1939, modifies the regulagions governing the Profits Tax Law (Law of January 29, 1931) promulgated by Decree No. 690 of May 14, 1931. The regulations contained in Decree No. 1117 supersede those of Decree No. 690 of May 14, 1931, and all subsequent modifications. The modification of the regulations has effected several significant changes. Particular attention is directed to the following summary, prepared by the American Chamber of Commerce of Cuba, which attempts to briefly outline the more important aspects thereof: 1. Articles 1 to 24 of Chapter I of the previous regulations have been eliminated. These articles contained the regulations governing the income tax established by the Emergency Tax Law of January 29, 1931, which tax never became effective. 2. Paragraph (a) of Article 1 of Chapter I extends to dividends the 5 percent tax on interest paid to holders in Cuba of foreign securities. 3. Paragraph (b) of Article 1 of Chapter I limits the special 2 percent tax (instead of the regular 4 percent tax) on interest received from agricultural loans to interest on loans used exclusively for agricultural purposes. 4. Paragraph (c) of Article 1 of Chapter I broadens the application of the tax on the interest on loans not secured by real estate to cover all loans executed in any legal form. Formerly this tax only applied to loans covered by notarial deeds (escritura publica) and private documents. 5. The fourth paragraph of paragraph (c) of Article 1 applies the tax on interest to the interest on loans made by pawnshops, and definitely exempts them from paying any other taxes on profits realized on such loans. Pawnshops, however, must pay taxes on profits obtained from other sources. 6. From the point of view of public auditors section (9) of Article 19 of Chapter II is of special importance as it releases them from responsibility for errors of commission (inexactitud dolosa) in tax reports audited by them. According there to the taxpayer and the person preparing the taxpayer's report will be held jointly responsible for such errors. 7. The fourth paragraph of Article 31 of Chapter II provides that in respect of interest due and not paid, the creditor may for tax purposes carry such overdue interest in a suspense account until it is paid. Upon payment of such overdue interest the tax must be paid as of the tax period during which it became due. In the past, the Government required payment of the tax on all interest due, whether it has been paid or not. 8. The fifth paragraph of Article 31 of Chapter II provides that tax payers are not required to include in their income, for tax purposes, credits against the State, Provinces, and Municipalities for labor, materials, or services if the amounts have not been paid within the designated tax period. These credits when finally paid, however, must be declared as revenues for the period during which they are paid. These provisions are applicable also to credits of entities operating public aqueducts. The first article of the Transitory Dispositions applies retroactively the provisions of paragraph five of Article 31 to all balances closed subsequent to December 31, 1932. This retroactive provision will not apply, however, to those cases where the corresponding taxes have been paid without recourse and are not subject to refund. 9. Article 33 of Chapter II regarding deductible expenses has been modified and the schedule governing the amount of directors' managers' salaries which may be deducted as expenses has been broadened. or 10. Section (f) of Article 33 of Chapter II provides for depreciation of reserves of mines, forest lands, plantations, and cane plantings on the amount of capital invested. It further provides that the capital invested in cane plantings may be amortized in 5 years at the rate of 20 percent per annum beginning with the tax period following that in which the cane was sown. 11. Paragraph (i) of Article 33 has been added and provides that interest paid on short term loans may be deducted as an expense as long as the loans do not increase the assets of the business by being invested in improvements or purchases of property. 12. Paragraph (11) of Article 33 provides that doubtful accounts (bad debts) less than 3 years old may be deducted as losses in the tax period during which they have been written off the books of the tax payer. Prior to Decree No. 1117 doubtful accounts could not be deducted as losses unless they had been carried on the books for a year and when the tax payer had furnished satisfactory proof of the debtor's insolvency, prescription of the account in accordance with law, or extinction of the account by reason of unquestionable legal cause. Under the new regulations the only requisite in order to deduct doubtful accounts as losses is that the tax payer must declare under oath that he has employed all usual measures for collection of the account without results. 13. Paragraph (n) of Article 33 provides that amounts paid for premiums for workmen's compensation, fire, or any other insurance required by law may be deducted as expenses of the business. 14. Article 41 of Chapter III provides that in the case of purchase of property which is being depreciated on the books of the seller the purchaser may depreciate the property on the basis of the remaining number of years of useful life instead of setting up a new depreciation account on his books. 15. Articles 45 and 46 of Chapter III establish special rules and provisions for the depreciation of properties of mining and oil companies. APPLICATION OF THE REGULATIONS A local firm of sugar brokers has analyzed the new regulations as they affect the sugar industry. Their views are submitted herewith in the belief that the application of the regulations to a specific industry may tend to illustrate the effect of the law: To begin with, interest charges receivable but not collected will no longer be perforce taxable as profits. If collection is considered doubtful by the taxpayer, assessment may be held in abeyance until actual collection, whereupon the difference in assessment involved shall be properly settled. All interest charges paid and payable will be treated as expenses and therefore deductible from taxable profits. Omission of a qualifying rule whereby interest payments in connection with, regular business operations could be treated as expenses, and therefore deducted from taxable profits, only if paid to another profit-taxpayer, is the most important feature of the new Decree. Interest payments on debts outstanding upon promulgation of the new Decree, as operating expenses will now be also deductible from taxable profits, but only up to a maximum of 4 percent for debts not included in the Moratorium Law and up to the statutory interest rate for those included therein. However, interest payments on bonds or other capital debts shall not be deductible as operating expenses. Under Decree 690 of 1931, executive officers' and board members' salaries, provided they did not exceed 5 percent of gross revenues, as operating expenses were also deductible from taxable profits. For the original 5 percent upper limit, Decree 1451 substituted a scale found much too moderate in practice. A more reasonable scale has been again substituted under the new Decree, allowing deductions of 5 percent for gross revenues of $50,000 and under, 4 percent for the next bracket up to $200,000, thence 34 percent up to $500,000, and 3 percent above this figure. Therefore, at the current price levels, a 100,000 bag sugar mill, for salaries of directors active at the plant, may deduct up to $20,000 from its taxable profits. Under Decree 690 of 1931, doubtful, defaulted, or uncollectible bills were deductible as operating losses only after keeping the relative credits in a special account for 1 year, whereupon they were carried as uncollectible, under sworn statement, to the Profit and Loss account. Requirements to that fact under Decree 1451 of 1938 became So stringent that in practice no bills receivable could be deducted as operating losses. Satisfactory proof of the debtor's insolvency, of the credit's prescription according to law, or of its extinction for irrecusable legal causes had to be produced and admitted. Defaulted credits will be treated as losses under the new Decree, provided their relative entries in the taxpayer's books have been canceled within the year of their deduction from taxable profits. Credits kept inactive for more than 3 corporate business years as assets in the taxpayer's balance sheet and still pending cancelation as of the final day of the third business year of that period shall not be accepted as deductible losses by the Treasury Department, however. All expenses paid and payable will be deductible, in the latter case provided a liability has been incurred. Moneys disbursed for cane sowing will be treated as depreciation. Such investments may be written off in 5 years at the rate of 20 percent per annum. 4 translation of the amended Regulations follows: CHAPTER I TAX ON INTEREST Article 1. (a) Interest or dividends upon securities issued in foreign countries, whether delivered in Cuba or abroad, will be taxed 5 percent. (b) Dividends upon stocks or interest on bonds of corporations, silent partnerships, and those of limited liability, will be taxed 4 percent. Interest on loans for agricultural purposes exclusively, will be taxed 2 percent, instead of 4 percent. (c) Interest on loans not secured by real estate, executed in any legal form, excluding only those made by banks or bankers in national territory, which contribute in accordance with Tariff 4 of Chapter VI of the law of January 29, 1931, and taking the legal interest as basis for liquidation of tax when no other rate has been agreed, will be taxed 4 percent. Article 11. Subject to the tax on net profits obtained in Cuba are: (a) Individual merchants and manufacturers and all commercial and industrial companies or organizations (excepting those included in succeeding sections) who shall pay in accordance with the following scale: (b) Corporations; silent partnerships, in which investments are represented by shares of stock; limited liability companies; banks and bankers; all industrial and mercantile organizations, established, or which may be established in Cuba or abroad, for sugar manufacturing; individuals in that same industry and mining companies shall pay taxes in accordance with the following scale: Amount Up to $100,000 Upon the excess over $100,000 up to $ 500,000-- Do. 500,000 .do.. 1,000,000. 1,000,000-. Percent 10 12 15 20 (c) Railroad companies and national navigation enterprises established in Cuba shall pay 8 percent upon their net profits. (d) Cooperative production, consumption or credit organizations shall pay 4 percent upon their net profits. (e) Stock companies which render public service by virtue of concessions granted by municipalities or by the State, and pay to the former an annual amount in cash in proportion to the net proceeds of industry, or other tax on profits, in accordance with the terms of the concession, shall pay taxes in accordance with the tariff applicable to other stock companies, but when determining the tax to be paid to the State there shall be deducted the percentage which, in accordance with the concession, was taken as a basis for payment of the tax to the municipality at the time of promulgation of the Law of July 6, 1928. If the company is paying a percentage to the municipality of its gross revenues, in the tax to the State 2 percent of gross revenues shall be considered equal to 4 percent of profits. For application of the provisions of the foregoing paragraphs, there shall be taken into account only the taxes which the companies are paying to the municipality in accordance with the respective concession. The preceding provisions will not be applicable to companies which obtained any public service concession from municipalities after enforcement of the Law of July 6, 1928. (f) A tax of 3 percent on gross incomes (in place of the tax on profits) shall be paid by all foreign companies operating in Cuba through branches, subsidiaries, legal representatives or agents, which fix by contracts, or any other means, the cost and sales price of the merchandise in which they trade and which are unable to present satisfactory proof of prices and evidence to the Government that the lack of profits is not due to price manipulations; and when they have contracted with foreign companies to receive a percentage of the income obtained in Cuban territory for the sale, lease, exhibition, etc., of transmitted articles: even when the companies are Cuban companies. Also subject to these provisions are radiotelegraphic, cable graphic and radiotelephonic companies. EXEMPTIONS Article 12. Exempted from the Profits Tax are: (a) Foreign navigation companies which render cargo and passenger service between national and foreign ports these are subject to = other taxes. (b) Cooperative enterprises of the laboring classes, provided their status as such is shown in Department of Labor Registers, and that they do business with their members only. (c) Enterprises engaged in publication of newspapers, magazines and books. (d) Establishments destined to superior or elementary instructions in science, art, trade, etc. (e) Individuals or companies registered as taxpayers in connection with the 35,000,000, loan taxes this exemption will be limited to operations subject to such taxes. (f) Individuals and companies engaged in leasing urban property and who pay to the municipalities a percentage of their income or profits. (g) Benefits or profits obtained by cattlemen from sale of their cattle; profits obtained by farmers from agricultural activities; profits obtained by cane planters from sale of their agricultural products, unless the plantation is operated by a stock company which has leased or sub-leased (directly or indirectly) the land from the individual or company operating the sugar mill which acquires the |