Rum Tax Loss May Harm Island
Diageo, the world's largest producer of alcoholic beverages, plans to relocate a large rum distillery from Puerto Rico to the neighboring Virgin Islands, a move that will deprive Puerto Rico of hundreds of millions of dollars in much-needed tax revenue.
Diageo, the world's largest producer of alcoholic beverages, plans to relocate a large rum distillery from Puerto Rico to the neighboring Virgin Islands, a move that will deprive Puerto Rico of hundreds of millions of dollars in much-needed tax revenue.
Puerto-Rico-based Destilería Serrallés currently operates distilleries in Ponce, Arecibo and Camuy which produce Captain Morgan rum for Diageo, along with their own locally-popular Don Q brand. Diageo plans to move production of Captain Morgan rum to the Virgin Islands in 2012.
The USVI government has offered Diageo numerous incentives to relocate to St. Croix, including hefty tax breaks, public infrastructure, a new $165 million distillery and a large portion of tax refunds known as 'cover-over' funds.
Rum sold in the United States is subject to an excise tax of $13.50 per gallon. Each year, the US government returns $13.25 per gallon to Puerto Rico and the Virgin Islands. The amount of funds returned is based on the quantity of rum produced in each territory and sold in the US.
In 2008, Puerto Rico received $470 million in cover-over funds, which were used to improve infrastructure, to fund numerous conservation projects and to market Puerto Rican rum worldwide. Puerto Rico may lose $200 million each year in tax revenue as a result of the move.
Governor Luis Fortuño has written to members of Congress with his criticism of the incentives offered to Diageo by the USVI, which include a 50 percent share of the USVI's cover-over funds, tax breaks and infrastructure funding which could total $4 billion over 30 years.
With these incentives, Diageo will be able to produce Captain Morgan at a negative cost and sell the rum worldwide, a move Fortuño said "would be an actionable subsidy under US international fair-trade commitments" as federal tax money would benefit Diageo's international sales.
"Puerto Rican producers would find it very difficult at best to compete with distillers subsidized to the extent planned in the Virgin Islands," Fortuño wrote. Puerto Rican law limits the island to spend no more than 10 percent of cover-over funds to benefit rum producers. The USVI has not established similar limitations.
Puerto Rico's resident commissioner Pedro Pierluisi has introduced a bill which would limit all US territories to spend a maximum of 10 percent of cover-over revenues to subsidize rum producers. Eight voting members of the House of Representatives have sponsored the bill.
Construction of the new Diageo distillery in St. Croix is scheduled to begin in 2010.