The rum trade is facing a major change. Diageo, the British-owned parent company of Captain Morgan rum – the largest distiller of rum in the world, has decided to transfer its operations from Puerto Rico to the Virgin Islands.
As U.S. territories, Puerto Rico and the Virgin Islands are the beneficiaries of a rum excise tax. The tax collects revenue from rum imported to the American mainland and reverts it back to the islands for economic use. Under the excise tax scheme, rum exported from Puerto Rico and the Virgin Islands generates rebate money contributable to the territories’ treasuries proportionate to the amount of rum locally produced. Puerto Rico, home to four major rum distilleries, receives the greater tax benefit in this respect, while the Virgin Islands, home to only one major rum distillery, receives the lesser.
The move, expected in 2012, is going to shift part of Puerto Rico’s tax benefit to the Virgin Islands. Now, even as Puerto Rico expects to lose over $6 billion in long-term revenues and 320 permanent jobs, the Virgin Islands expect to gain, in kind, $230 million in long-term revenues and 70 permanent jobs.
Unsurprisingly, while the Virgin Islands see Diageo’s move as encouraging progress “towards fiscal self-reliance,” Puerto Rico sees cause for major concern. Last year, Puerto Rico used less than ten percent of the $450 million it received in rum revenues on its rum-producing businesses and used the rest of the rebate to support necessary island infrastructure and social service programs. With Diageo’s planned departure, Puerto Rican officials have accused the Virgin Islands of forcing them to dismantle their socially-conscious revenue allocation system. The officials claim that the Virgin Islands lured Diageo to their shores via a “sweetheart deal” that subsidized its corporate interests with public money and set an ominous precedent in the Caribbean for courting big business at any price.
Diageo’s decision to move from Puerto Rico to the Virgin Islands, in fact, was based on a tax incentive offer worth $2.7 billion. Under a thirty year contract, the Virgin Islands promised Diageo: a new plant built at taxpayer expense; exemption from all property and gross receipt taxes; a ninety percent reduction of corporate taxes; marketing support; and production. All in all, when Diageo moves to the Virgin Islands in 2012, the territory will allocate almost half of its excise tax revenue to the company each year by contract.
A bill currently before Congress could threaten the Diageo deal; if passed, it would cap the amount of rum rebate that the Virgin Islands and Puerto Rico are able to use in subsidizing rum producers. In the U.S., tax reform debate has swirled around the idea of preventing the “government [from] . . . using federal funds to guarantee [the] profits of . . . huge multinational corporation[s]’” and offshore enterprises. Indeed, Diageo’s relocation has generated a good deal of mainland American angst. Legislators fear that the Virgin Island tax incentives may prove so great that island liquor companies might start making whiskeys, vodkas, and gins in competition with those made in the heartland. Also of concern is the consideration that lost rum revenues in Puerto Rico may injure its economy, forcing higher taxation from Washington.
Does Diageo’s transfer empower island residents “to control [their] own destiny,” as predicted by Virgin Island officials? What should the outcome of these so called “rum wars” be? Is concern for higher taxation from Washington justified?