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Diageo and Bacardi Rum & tax conflict:

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Diageo and Bacardi Rum & tax conflict

  • Mar 13, 2010

Diageo is attacking rival Bacardi because of Bacardi’s “hidden campaign” for rum supremacy in America that would "kill" off a series of lucrative tax excises that the maker of Captain Morgan rum would receive by shifting production from Puerto Rico to the US Virgin Islands (USVI).

This whole war started when Diageo decided in 2008 to leave Puerto Rico since they have a deal with the USVI involving a new rum distillation facility on St. Croix where it will produce Captain Morgan rum for at least 30 years, starting from 2012 when its contract with third party Destileria Serralles from Puerto Rico runs out. This new distillery is located on the island of St Croix and is a launch pad for Diego’s expansion in America. It is being built with bond money backed by future rum “cover-over revenues”. Diageo said that Bacardi officials have been lobbying US congressional leaders to force the London-based drinks giant to move production outside the US. This would not only protect Bacardi's "own huge government rum subsidies", but it would also prevent the maker of Johnnie Walker whisky from raking in huge annual tax incentives from producing and selling rum on American soil.

The FTSE 100 spirits group published a 13-page missive accusing privately-owned Bacardi of using clandestine and selfish tactics to block its main US rival’s expansion in America. Guy Smith (executive vice-president Diego’s North America and author of the emotive statement) claimed Bacardi’s move was a “hidden campaign to drive a rum competitor out of the US and destroy the economy of the US Virgin Islands. The company (Bacardi) has been working behind the scenes in collaboration with other self-interested constituents and corporations and has used front groups and Puerto Rico politicians to make spurious claims about the US Virgin Islands initiative." He also said the National Puerto Rican Coalition (NPRC) is urging the Hispanic community in Puerto Rico and throughout the United States to boycott Diageo goods.

However, a Bacardi spokeswoman hit back at the "13-page attack by Diageo". She said: "This issue is about one point: the appropriate use of approximately $2.7bn in taxpayer money. This isn't about where Diageo receives a free distillery, but about the proper use of federal tax dollars. Diageo has some explaining to do to the US Congress and American people." The NPRC said that Diageo would get $2.7 billion in US taxpayer-funded subsidies for the move. It quoted Felix Serralles of the Puerto Rican liquor company as saying the subsidies “will be almost twice the cost of production of the rum”.

The rebates are given to the US Island’s governments, which in turn give a portion to rum producers as assistance. When Diageo moves its output to the Virgin Islands, Puerto Rico and its major producer Bacardi would lose a significant chunk of financial support. Diageo argues that Bacardi fears it will use the direct and indirect tax incentives to invest heavily in the Captain Morgan brand, a direct competitor, such as through marketing and beefing up production at the fully owned facility in the US Virgin Islands.

These are essentially American tax refunds (from the excise duties levied on the spirit) awarded to US territories. For more than 50 years, the US Congress has provided "rum cover-over" revenues to help the US Virgin Islands attain economic stability, but until the 2008 initiative it had failed to attract substantial rum production. In a quirk of the archaic law, local authorities can sign over such cash to the distillers themselves via such things as local tax breaks and advertising subsidies. According to Bacardi, Diageo stands to rake in $2.7bn of US taxpayer funds over the next 30 years from its pact with the island territory. This made the Puerto Rican government reacted to the plans with fury. It has attempted to get US Congress to change the rules and cap payments, which would make Diego’s agreement untenable.

Puerto Rico currently gets about $450m a year from the programme. It will loose $150m a year Because Captain Morgan wants to relocate. The Virgin Islands are currently the recipient of $90m and will gain this big amount. According to figures from the Center for Responsive Politics, the territorial governments each spent more than $1 million in 2009 on lobbying efforts that included the rum spat.

Guy Smith said Diego’s deal was “a historic and innovative public-private initiative… that would lift the US Virgin Islands’ economy out of crisis. Should the agreement collapse Diageo may be forced to move outside the US to the huge benefit of Bacardi and Puerto Rico. The Virgin Islands are under attack by the entrenched corporate interests of a wealthy family seeking to maintain their decades-long grip on rum subsidies”.

Diageo also hit back at accusations that it was responsible for the loss of 400 jobs in Puerto Rico by stressing it did not own the distillery in the country and had served notice on Serralles three years ago. Guy Smith said that Bacardi receives "tens of millions of dollars a year" from annual government rum subsidies.

This fight is even including senators in the USA. Florida's two senators are taking heat for taking sides in this rum war. Florida Sen. Bill Nelson is said to be drafting legislation aimed at blocking the deal, enraging allies of the Virgin Islands, including the National Black Chamber of Commerce, which fired off a letter to Nelson saying his intervention would hurt the only African-American majority territory in the United States. The group also accuses Florida Sen. George LeMieux of joining the campaign on Puerto Rico's behalf.

Chamber president Harry Alford said: “It's not their fight to begin with. They don't represent the Virgin Islands or Puerto Rico, so why are they stepping in to do damage to the Virgin Islands? The Virgin Islands needs this. It's been in bad shape over the years.''

Harry Alford contends Diageo had already decided to leave Puerto Rico and that the Virgin Islands made a tempting offer. He said: “It's like Ohio and Indiana fighting over locating a plant; that's business.” Three members of Congress of Puerto Rican descent and the island's resident commissioner (who have proposed legislation similar to Nelson's) say the deal would put Puerto Rico at a competitive disadvantage. They now use about 6 percent of its tax revenues to promote its rum and spend the rest on economic development. But under the Virgin Islands' deal, ``Diageo will be provided with direct subsidies and other incentives that may amount to up to 50 percent of the USVI's new excise tax revenue,'' the Puerto Rican representatives said.

A number of lawmakers question the wisdom of using billions of dollars of American taxpayer’s money to build a rum plant in the Virgin Islands for a foreign company. There are also about 750.000 Puerto Ricans in Florida that could create a potential voting bloc.

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March 16, 2010
I love rum. But man, I hate how our tax money is spent.
March 13, 2010
Subsidy should go only to the people and never to corporations. Great article Rene (i mean Rumpages...).
March 16, 2010
I listen to many names. Even to Van Hoot, idiot and morron.
March 16, 2010
Van Hoot--- i love it!
March 13, 2010
Great article Rumpages! I added a few tags for you!
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Rene van Hoven ()
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Member Since: Feb 19, 2010
Last Login: Mar 18, 2010 07:44 PM UTC
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