611.3731/12–1846

The Ambassador in Cuba ( Norweb ) to the Secretary of State

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No. 2573

Sir: I have the honor to refer to previous correspondence, and particularly to the Department’s instruction no. 1164 of November 23, 1946 (file no. 611.3731/9–546),85 on the subject of Cuban violations of the Reciprocal Trade Agreement between the United States and Cuba. The Embassy was gratified to learn that the Department was able to take up these matters in detail with the Cuban Minister of State and Dr. López-Fresquet prior to their departure for the London Preparatory Meeting, and appreciated receiving its summary of the discussions held.

With regard to the various points raised by the Department and/or Dr. López-Fresquet, the Embassy’s comments are given below, in accordance with the Department’s request:

1. Import package tax.

In stating that only the Cuban Congress could repeal this tax, but that it would be “suspended”, Dr. López-Fresquet doubtless meant that while the tax was established by an Act of Congress and therefore could not be repealed by decree, it could be suspended by the President under the emergency powers granted him by Decree-Law no. 5 of January 20, 1942.

Article XIV of that decree-law authorizes the President, in his discretion, to suspend partially or totally “any tax which may affect [Page 758] the development of national defense or supply”, provided the proceeds therefrom are not pledged to the public debt service (see despatch no. 3315 of January 22, 1942, entitled “Cuban decree-law authorizes President to control production, distribution to other phases of Cuban economy”86). These powers were invoked in Decree 2144 of August 7, 1945, granting certain tax exemptions to new industries (see despatch no. 116 of August 18, 1945, entitled “Cuban Government Enacts Additional Measure Designed to Encourage Cuba’s Industrial Development”86), and in several other tax exemption decrees on which the Embassy has reported to the Department.

With regard to López-Fresquet’s statement that a decree suspending the package tax “might even have been issued while he was in Washington”, it is probably hardly necessary to mention that no such decree has been promulgated and that there is no indication that such a measure is contemplated.

2. Discrimination against imports in tax exemptions for new industries.

It is noted that Dr. López-Fresquet is of the opinion that paragraphs I) and J), Article Second of Decree 2144 of August 7, 1945 (despatch no. 116 of August 18, 1945, mentioned above), refer only to production taxes, which are levied on domestic raw materials and not on imports, and that there is therefore no discrimination against United States raw materials.

It is the Embassy’s opinion, and this has been confirmed by reliable local tax lawyers, that the exemption from specific taxes established by paragraph I) is not limited to production taxes, but covers all taxes specifically applicable to raw materials, such as the consumption taxes assessed on salt and gasoline, etc., to which both domestic and imported raw materials are subject. A definite conflict therefore does appear to exist between this particular provision of Decree 2144 and the letter of Article VIII of the Reciprocal Trade Agreement, and the protest which the Embassy made in the premises, pursuant to the Department’s instruction no. 169 of October 23, 1945,86 was consequently in order.

As regards paragraph J), this refers specifically to the tax on profits, and has no connection with any production tax. It is, as the Department agreed in its above mentioned instruction 169, contrary to the spirit of Article VIII of the Trade Agreement in that it exempts local industries from payment of the profits tax in direct proportion to the value of the Cuban raw materials consumed.

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3. Discrimination against imports in suspension of tax on refining of crude petroleum.

Contrary to what Dr. López-Fresquet told the Department, the ¼ centavo per gallon refining tax on crude petroleum, although applicable to both domestic and imported crude oil, is actually collected only on the imported product. Several weeks ago, possibly as a result of the Embassy’s representations, the Ministry of Finance announced its intention of collecting the tax also on the crude oil produced and refined in the Jarahueca area of Cuba. When this became known, the Jarahueca producers registered a strong protest and the Jarahueca laborers threatened to go on strike. These protests and threats have apparently been successful, as the Embassy has learned from a reliable source that a decree has been drafted and is awaiting the President’s signature which, if enacted, would specifically exempt Jarahueca crude oil from the refining tax for a five-year period. As the decree would not, however, according to the same source, make this exemption extensive to imported crude oil, it would officially confirm the existing violation of the Trade Agreement against which the Embassy has protested.

4. Discrimination against imports in the Cuban consumption tax on gasoline.

It is noted that the Cuban delegates agreed to recommend to the Cuban Government that the exemption from this tax on Cuban gasoline and substitutes be eliminated. As Dr. Alberto Inocente Alvarez, the Cuban Minister of State, has just returned from the inauguration of the new President of Mexico, this matter will be taken up with him as soon as a suitable opportunity presents itself.

5. Discrimination against imports in the Cuban gross sales tax.

a. Cuban merchandise granted 20% reduction in tax.
The argument submitted by Dr. López-Fresquet that the 20 percent reduction in the gross sales tax granted Cuban manufacturers under Decree 643 of March 27, 1946, is to cover their advertising expenses and is therefore not discriminatory, appears to be irrelevant. Cuban manufacturers pay the tax on their wholesale selling price; articles imported from the United States pay the tax on their cost delivered in Cuba, which includes not only the wholesale selling price of the articles in the United States, but also consular invoice fees, ocean freight, maritime insurance, import duties and the many other taxes collected in the Cuban customs. In addition, the importer of such articles, if he is to be able to compete in the Cuban market, must presumably also advertise.
Aside from all these factors, however, which seemingly make the discrimination even more onerous, the basic fact remains that local manufacturers pay a tax of only 7.2 percent, while the imported article pays a tax of 9 percent. If this situation is not remedied, the Cuban Government might conceivably reduce still further the tax on domestic products, or even eliminate it entirely, increasing it proportionately on the imported article. It will be recalled in this connection that serious consideration was given at one time to the suggestion that the tax be applied only to imported articles and not to articles manufactered in Cuba.
b. Exemption from tax of Cuban commercial sample.
Since it is noted that the Cuban delegates propose to request the Cuban Government to take action looking toward the elimination of this discrimination, the matter will be followed up with the Cuban Minister of State at an early opportunity.
c. Discrimination against imported salt.
Same remarks as for item b.
d. Discrimination against imported periodicals.
See the Embassy’s despatch no. 2546 of December 9, 1946 (file no. 851.2 x 631), transmitting a copy of its note no. 827 of December 5, 1946,87 following up its previous representations with regard to this matter.

6. Increases in export tax on money.

There is no basis for Dr. López-Fresquet’s argument that the several increases which have been made in the export tax on money or its equivalent were designed to prevent the exportation of funds from Cuba to Spain. The tax was originally created as a 14 of 1 percent tax by the so-called “Public Works Law” of July 15, 1925. It was increased from ¼ of 1 percent to 1 percent by Decree-Law no. 1 of December 31, 1941, and from 1 percent to 2 percent by Law no. 7 of April 5, 1943. At the time these increases were made, the exportation to Spain of means of payment of all kinds had already been prohibited by Decree 3366 of December 15, 1941. Neither does there appear to be any reason why the President, under the previously mentioned emergency powers conferred upon him by Decree-Law no. 5, could not, as suggested in the case of the import package tax, suspend the assessment of the export tax on money or its equivalent on all but the original ¼ of 1 percent, which is pledged to the service of Cuba’s public debt.

As the Department is, of course, aware, the most objectionable feature of the export tax on money or its equivalent is that, in so far as imports are concerned, it amounts, in effect, to an additional ad [Page 761] valorem import duty of 2 percent, thereby circumventing and impairing the pertinent provision of Article VIII of the Trade Agreement.

With regard to the Department’s request for information on the tax referred to on page 34 of the enclosure to the Embassy’s despatch no. 5735 of January 19, 1944, entitled “Transmitting Monograph on Cuba”,88 this is the same 2 percent export tax on money or its equivalent, as will be seen from the pertinent sections of Chapter XII of Law no. 7 of April 5, 1943, quoted below in translation:

“Article 66. An increase of one per centum (1%) is made in the tax on direct or indirect extraction of money or its equivalent, established by Article XVII of the Law of July 15, 1925, amended by Article I of Chapter IV of Resolution-Law no. 1, of December 31, 1941.

“Article 67. There are excepted from the increase of one per centum (1%) referred to in the preceding article, operations relative to exportations of merchandise, products, produce and securities, which will continue to be governed by the provisions of Article XVII of the Law of July 15, 1925, as amended by Resolution-Law no. 1, of December 31, 1941.

“Article 68. Notwithstanding the exception referred to in the preceding article, when the amounts obtained abroad as the result of the exportations to which it refers are spent, utilized or consumed abroad, they shall be taxed by the increase of one per centum (1%) to which Article 66 of this Law refers. It will be assumed that the total or partial proceeds of an exportation are spent, utilized or consumed abroad when the interested party cannot show their entry or reentry into Cuba in the time and manner that the regulations of the tax specify.”

It will be noted from the above that while exporters are required to deposit, for the purposes of the tax, only 1 percent of the value of their shipments abroad, in actual practice they pay either 2 percent or nothing: If the returns from the exports under reference are received by the shippers within the prescribed time limit, their deposit is refunded; if not, they are required to pay the tax at the full rate of 2 percent. Moreover, the proceeds from exports, if kept abroad beyond the aforementioned time limit, and funds remitted abroad for investment or deposit, are liable, in addition to the 2 percent export tax, to the 0.15 percent monthly tax on Cuban capital held abroad (established by Chapter II of Law no. 7), which is assessed until the funds in question are repatriated.

With regard to the Department’s interest in obtaining a rough estimate of the total value of the remittances to the United States which, in 1945 or any recent year, were subject to the 2 percent export tax, and its reference to an estimate made in 1943 by Mr. F. Adair [Page 762] Monroe, former President of the American Chamber of Commerce of Cuba, which placed such remittances in 1942 at approximately $150,000,000, the following information is submitted:

Inquiry reveals that Mr. Monroe’s figure was arrived at by adding to the total value of general merchandise imports into Cuba from the United States during 1942, namely, $123,000,000, an estimated $27,000,000 representing interest payments, profits, insurance, ocean freight and other invisible items. The Embassy believes that his estimate is near enough for all practical purposes, especially as official data on invisible items entering into Cuba’s balance of payments with the United States are not available. On the same basis, therefore, remittances to the United States subject to the tax during 1945 are estimated at not less than $213,000,000, consisting of $187,962,683 representing imports of general merchandise into Cuba from the United States and $25,000,000 representing invisible items. This latter figure would, of course, be subject to considerable revision, either upward or downward, if detailed information on remittances of this kind were available. It is believed by banking contacts, however, to be fairly representative.

Respectfully yours,

For the Ambassador:
Albert F. Nufer

Counselor of Embassy for Economic Affairs
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