Puerto Rico Steps Up Rum Tax Campaign

by Mike Godfrey, Tax-News.com, Washington

27 November 2009

US Virgin Islands Governor, John deJongh has visited Washington to oppose Puerto Rican Resident Commissioner Pedro Pierluisi’s media campaign to limit subsidies to rum makers to a maximum of 10% of total rum-tax revenue from the 'cover over' program.

Disagreement between the territories arose in June 2008, when Diageo, a UK headquartered international drinks company, announced a public-private initiative to build and operate a high-capacity rum distillation facility in St Croix, US Virgin Islands, that will age and supply all rum used to produce Captain Morgan products for the US for at least thirty years beginning in 2012.

About USD470m a year in rum duties collected in the US is returned to Puerto Rico and the US Virgin Islands in what is known as a tax 'cover over'. The rebates to the islands are intended to support economic development and social programs. Most of the money is dedicated permanently, but USD3.25 of the USD13.50 per bottle duty is granted on an annual basis, based on need.

Diageo will benefit from subsidies estimated at USD192m plus an ongoing annual amount that could yield USD2bn over the 30 years of the agreement. It is taken from the the Virgin Islands' cover-over rebate, but the cancellation of Diageo's longstanding contracts with Puerto Rican rum distilleries will create a huge loss of rebate to Puerto Rico.

The Pierluisi bill would create a rule prohibiting Puerto Rico and the Virgin Islands from using cover-over funds to provide unreasonable subsidies to rum producers. "I am willing to be flexible," Pierluisi was quoted as saying by Business Week, continuing: "The limit imposed does not have to be the 10% cap contained in my bill."

Virgin Island Congresswoman Donna Christensen countered: “While we don’t believe that Pierluisi’s bill will get a hearing, we wanted to make sure that the leadership of the House had a balanced view on the issues in wake of an aggressive campaign in the Capitol Hill media that distorted the Virgin Islands’ use of the cover-over proceeds.”

Governor deJongh clarified the Virgin Islands position, explaining that the Virgin Islands did not recruit Diageo, and that the agreements would give the territory the opportunity to stabilize its economic development well into the future.

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