Puerto Rico Tussles Over Rum Deal

by Mike Godfrey, Tax-News.com, Washington

09 October 2009

The future of two competing bills concerning the extension of rum tax rebates, the 'Cover-Over Program', in Puerto Rico and the American Virgin Islands is being considered in the US House Ways and Means Committee.

Pedro R. Pierluisi, Puerto Rico's representative in the US House, introduced a bill in April that would limit subsidies to rum makers to a maximum of 10% of total rum-tax revenue, while Donna M. Christensen, the Virgin Islands’ delegate in the US House, introduced a bill that would make the full 'cover over' payment permanent and do away with the need for congressional votes every year or two.

The US receives only 25 cents of the USD13.75 tax levied on each gallon of rum imported from Puerto Rico and the Virgin Islands; a total of about USD470m a year is returned to these US territories 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 is granted on an annual basis, based on need. It is this part that the Christensen bill seeks to make permanent.

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.

At the same time as Diageo will benefit from subsidies taken from the cover-over rebate, Diageo cancelled its longstanding contracts with Puerto Rican rum distilleries which will create a huge loss of rebate to Puerto Rico. ProPublica.org, describing itself as an independent, non-profit newsroom, reported the extent of the 'marketing subsidies and production incentives' accruing to Diageo to be USD192m plus an ongoing annual amount that could yield USD2bn over the 30 years of the agreement. Between 150 and 300 jobs will be created in the new distillery when built.

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. An excess of 10% of cover-over funds would be deemed unreasonable and a subsidy less than 10% may be found unreasonable if the US Department of Treasury concludes that it has the effect of encouraging a rum maker to move production from one territory to the other.

Puerto Rico Governer Luis Fortuno told The Washington Times that the 10% cap on subsidies would prevent more of the rum tax from being diverted from island residents to foreign business interests. "Otherwise, we'll just enter into a fight, a turf war, over how much money I'm going to give the next company, instead of supporting the local population and the government," he said.

According to a Puerto Rican official responsible for economic development, only about 6% of the Puerto Rican cover-over rebate is passed on to the rum industry, mostly for marketing and product promotion. He added that Puerto Rico has been careful about using funds to promote broad-based economic development, in a way that is consistent with the overarching purpose of the federal program.

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