Diageo and Bacardi step up war of words over rum subsidies

Nearly two years ago Diageo signed an agreement with the government of the US Virgin Islands under which the British spirits company would build its own distillery on the islands and move production away from Puerto Rico. In exchange, Diageo would benefit from financial incentives, which are at the heart of the row with Bacardi.

In his 13-page statement, Guy Smith, executive vice president of Diageo North America said the agreement forged in the Virgin Islands is “an historic and innovative public-private partnership” ​that Bacardi is seeking to jeopardise to protect its subsidies and competitive interests.

Smith laid out the reasons for the attack. “The media has largely disregarded the fact that the US Virgin Islands has the same right to rum cover-over revenue as Puerto Rico under long-established federal law. Nor has the media asked the basic journalistic question: who stands to benefit from overturning the US Virgin Islands initiative?”​

Rum cover-over revenue​

The rum cover-over revenue referred to by Smith is the excise tax collected on rum imported into the US that is transferred or “crossed-over” under US law to Puerto Rico and the US Virgin Islands. In 2008, Puerto Rico received over $371m in revenue this way and the US Virgin Islands received almost $100m.

The law does not impose any restrictions on how the countries use the transferred revenues. But legislation introduced in April last year by Resident Commissioner Pedro Pierluisi, who represents US citizens of Puerto Rico in Congress, aims to make it more difficult for them to offer direct subsidies to rum producers using the cover-over revenues.

Diageo, which produces Captain Morgan rum, claimed in its statement last week that Bacardi officials and lobbyists are visiting Congressional leaders to block the Virgin Islands initiative. Smith claimed that the company is also working with other self-interested constituents and corporations to pursue this aim in an effort to drive Diageo out of the US for their own commercial benefit.

Smith said: “Bacardi Limited, which receives tens of millions of dollars a year in annual government rum subsidies, has made a calculated decision to try to drive a competitor out of the United States even though it would be a disaster for the US citizens of the Virgin Islands.​

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“And why is Bacardi doing this? They know that because of a quirk in federal law they can protect their huge government subsidies by driving Captain Morgan rum production anywhere rather than the US Virgin Islands.”​

Bacardi response ​

Bacardi was quick to respond to these accusations. In a significantly shorter statement than the Diageo press release, spokesperson Patricia M. Neal said: “This issue is about one point — the appropriate use of approximately 2.7bn dollars 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.”​

A recently published Congressional Research Service (CRS) report, prepared for Congress members, gave a mixed assessment of the rum cover-over issue and the Diageo deal in the Virgin Islands.

It said the size and scope of the Diageo agreement with the US Virgin Islands is in some senses unique but said that the use of tax incentives and subsidies to attract industry has long been a part of sub-federal economic development strategies.

Nevertheless, it pointed out that the success rates of such initiatives have been mixed and noted that some critics have even suggested that such programs unnecessarily sacrifice tax revenues to influence location decisions that have already been made. To read the CRS report in full click here​.