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Rum Makers’ Conflict Boiling Over

The rum war is raging again.

After a brief détente, the makers of warm-weather favorites Captain Morgan and Bacardi are again at each other’s throats in a showdown that has both sides alleging underhanded tactics in the U.S. Virgin Islands’ bid to lure rum producers to the island with generous financial sweeteners.

Last week, the long-standing fracas again hit a fever pitch.

“Bacardi, World’s Largest Recipient of Public Rum Subsidies, Leads Hidden Campaign to Drive Rum Competitor out of the United States and Destroy the Economy of the U.S. Virgin Islands,” reads a Feb. 23 press release by Diageo, the United Kingdom-based distributor of Captain Morgan rum, as well as other popular spirits such as Smirnoff vodka and Tanqueray gin.

Nearly a year ago, Puerto Rico Resident Commissioner Pedro Pierluisi (D) proposed legislation that would cap at 10 percent cover-over rum subsidies, a long-standing revenue raiser for U.S. island territories that made headlines nearly two years ago when the USVI cut a generous 30-year deal with Diageo to move its facilities there from Puerto Rico. Since then, both companies have bankrolled a vigorous lobbying battle that now has each side embroiled in a nasty public relations donnybrook.

“We’re tired of the misinformation being given to Congress and you guys in the media,” Diageo Executive Vice President Guy Smith said on Friday.

In response, a Bacardi spokeswoman said, “Diageo has some explaining to do to the U.S. Congress and American people.

“This issue is about one point — the appropriate use of approximately $2.7 billion in taxpayer money,” Bacardi spokesman Patricia Neal said in a statement. “This isn’t about where Diageo receives a free distillery, but about the proper use of federal tax dollars.”

According to the Congressional Research Service, cover-over subsidies for U.S. island territories go back to 1917. In 2008, the taxes generated about $371 million for Puerto Rico and $100 million for the USVI. In a report by the nonpartisan Congressional agency, Puerto Rico promotes and markets its rum industry with the cover-over receipts, although “the exact amounts and extent of these activities is unclear.”

In a letter cited by the CRS, Pierluisi said that “Puerto Rico currently uses a small fraction of its annual federal excise tax revenue — about 6 percent — to promote Puerto Rican rums in general.”

Diageo’s potential USVI subsidies? Forty-five percent, according to CRS accounts.

Introduced in April 2009, Pierluisi’s bill is pending in the House Ways and Means Committee and has five Democratic and five Republican co-sponsors.

The National Black Chamber of Commerce also entered the fray last week, asking Puerto Rico Gov. Luis Fortuño (R) in a Feb. 24 letter to outline the Puerto Rican government’s rum subsidies.

“We have all heard rumors about discreet payments and indirect benefits to Puerto Rican rum companies and additional monies coming from the general fund to rum manufacturers — outside the cover-over program. I am concerned about these hidden government subsidies, which are not accounted for and are not publicly disclosed,” wrote Harry Alford, the chamber president. “Puerto Rico has a lengthy history of subsidizing its rum companies. This includes Bermuda-headquartered Bacardi Limited, the world’s largest rum maker and a powerful multibillion-dollar company, as well as Destileria Serralles.”

He continued: “Both companies, which are high-profile enterprises with strong sales and healthy financial standing, are participants in the misinformation campaign against the USVI.”

In a statement, Fortuño — who is Pierluisi’s predecessor — criticized the USVI-Diageo arrangement as anti-competitive.

“As public officials learn more details about the proposed deals in the Virgin Islands, they understand why it is bad economic and public policy to give billions in U.S. tax dollars to individual companies,” Fortuño said in a statement. “We welcome an honest debate on our concerns about these deals and on the merits of H.R. 2122, which would place responsible and reasonable limits on how these tax dollars can be used.”

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