Diageo’s Captain Morgan Rum’s distillery in the U.S. Virgin Islands is finally scheduled to produce rum by the end of the year. Diageo, the parent company of Captain Morgan Rum, and a United Kingdom-based company that is the largest distilled spirits maker in the world, expects the construction of their new St. Croix location to be completed by October and have rum in the aging barrels by December. This week’s simple announcement is packed with controversy that has been boiling for over a year. The rest of the complicated “story” is worth the read.
For many years, a third party distiller in Puerto Rico has been producing Captain Morgan Rum and selling it to Seagram’s. Diageo bought the Captain Morgan Rum label in 2001 inheriting this third party manufacturing agreement. They have looking for years how to arrange a way for them to produce their own rum under the Captain Morgan Rum label. With the manufacturing plant now being built for Diageo to produce the rum themselves, Puerto Rico will be losing millions of dollars that were coming to their territory from the rum excise tax. Since they will not be getting any of these taxes, they are protesting to the Congress that the U.S. Virgin Islands should not get any of them either, because the USVI is going to use these taxes in order to finance the construction of the new distillery on St. Croix.
Here is a brief description of the rum excise tax program. Rum produced in the U.S. territories and sold in the U.S. is taxed at $13.50 per proof gallon, and $10.50 per proof gallon is then returned to the territory where the rum is produced. In 1986 the amount was extended to $13.25, but that extension must be reauthorized periodically and that reauthorization was due by the end of 2009.
Not only is Puerto Rico protesting to Congress they are lobbying to have Congress change the rules related to the remittance of the rum excise tax to be paid to the USVI. Puerto Rico is not just mad about the loss of millions of dollars of the rum excise taxes, they are FURIOUS! They have secured a member of Congress with Puerto Rican heritage, Rep. Luis Gutierrez (D-Ill.) to co-sponsor HR 2122 to eliminate the rum excise tax. He said, “It is preferable for the whole program to be dismantled than to have it used like this. If one is going to use the program to enrich companies, it doesn’t have to exist at all.”
Puerto Rico and Rep. Gutierrez are claiming the USVI have enticed (bribed) Diageo to sign the agreement to produce their own rum on St. Croix by financing the construction of the manufacturing facility using the rum excise tax. And, when the cost of the plant has been recovered, the USVI will also share a portion of the rum excise tax with Diageo. Virgin Island Gov. John deJongh Jr. has stated to Congress that Puerto Rico’s case is completely wrong. The USVI’s never entice an established Puerto Rican business to leave their island.
Since 2001 when Diageo purchased the Captain Morgan Rum label they have looking for alternatives to end the arrangement it had inherited with Puerto Rico. Number One: Diageo has never has produced rum in Puerto Rico so how could they be lured away. Number Two: Since 2001 Diageo has been searching for a site where it could produce its own rum. Number Three: Diageo concluded very quickly it could not make a satisfactory arrangement with Puerto Rico. Number Four: Diageo had investigated sites in Jamaica, Guyana and Guatemala before they ever entered discussions with the USVI Virgin Islands.
This is a BIG deal for the USVI and their financial future. It will create about 120 new jobs, and generate almost $3 billion in rum excise taxes to the USVI over the 30 term of the agreement. We believe this is a significant Win/Win for the USVI and Diageo, and it is anticipated there will be no change in the laws regarding the rum excise tax rules currently in place in Congress. What are your thoughts about this drama between Puerto Rico and the USVI? Until next time…fair winds!