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Puerto Rican Bill Would Impact V.I. Rum Industry

April 28, 2009 — If a bill introduced Monday by Puerto Rico Resident Commissioner Pedro Pierluisi and others successfully makes its way through the legislative process, the money returned to the Virgin Islands as a rebate on federal rum tax, called the "cover over," could take a hit.
Gov. John deJongh Jr. didn't mince words in a Monday news release. He said the bill would undermine the agreement that was reached to build the Diageo rum distillery on St. Croix, and would force the payment of V.I. rum revenues to Puerto Rico. Diageo plans to manufacture Captain Morgan rum at its St. Croix plant.
"The efforts of the Puerto Rican resident commissioner smack of politics and are grounded in fundamental misrepresentations regarding the use of the cover-over revenues," deJongh said.
Pierluisi, in a statement on his website, said his bill seeks to prevent the Virgin Islands from using the funds it receives under the rum-rebate program to provide "unreasonable" subsidies to rum producers.
Diageo's agreement with the local government calls for the government to float up to $250 million in bonds to pay construction costs. The bonds will be paid back out of projected excise taxes from the sale of rum sold on the mainland. The federal government returns $13.25 of the $13.50 it collects in excise taxes on rum made in the territory to the Virgin Islands. Puerto Rico collects rum-tax rebates on its rum at the same rate as the Virgin Islands.
Pierluisi's bill mandates that a subsidy to a rum producer of more than 10 percent of the rum-tax rebate may be deemed unreasonable if the U.S. Treasury concludes that it is "excessive" in relation to the total amount of cover-over funds, and that the subsidy has the effect of encouraging a rum maker to move production from one territory to the other territory.
"The purpose of the cover-over program is, and has always been, to help the two territories provide for the general welfare of their residents and to promote broad-based economic development," Pierluisi explained. "The program was not designed to enable a territory to provide overly generous subsidies to rum makers. This bill will reaffirm the laudable goals of the cover-over program by precluding the territories from using cover-over funds to provide unreasonable subsidies to their rum producers."
Pierluisi's statement alludes to the fact that Diego is leaving Puerto Rico to build a plant on St. Croix.
"Diageo has never operated a rum distillery in Puerto Rico, but rather had a supply agreement with a private distillery there," deJongh said. "As their contract was coming to an end in 2011, Diageo decided that Captain Morgan had grown to a point where it was time to own their own production facilities. Given the dominance of Bacardi in Puerto Rico, they chose to look elsewhere, notably in Central America. It was at that point they contacted us to discuss building Captain Morgan's future in St. Croix."
The deal with Diageo is consistent with the intent of the U.S. Congress in the creation of the cover-over program, the governor said.
"Every state in the union is charged with the obligation of building its economy to the benefit of its people, so too are we, and that is what we have done," deJongh said.
Delegate Donna M. Christensen said in a news release issued Monday that she is surprised at Pierluisi's bill, because no one is currently taking issue with the fact that the Virgin Islands and Puerto Rico receive the rum rebate from the federal government.
Further, she said that if it was determined that the "incentive" provided by the Virgin Islands to Diageo to build its plant on St. Croix was unreasonable, the cover over would be given to Puerto Rico.
The rum rebate puts about $80 million a year into the territory's coffers. That figure is expected to more than double after construction of the new Diageo distillery on St. Croix is finished in 2012.
Puerto Rico's resident commissioner post is similar to that of delegate to Congress.
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April 28, 2009 -- If a bill introduced Monday by Puerto Rico Resident Commissioner Pedro Pierluisi and others successfully makes its way through the legislative process, the money returned to the Virgin Islands as a rebate on federal rum tax, called the "cover over," could take a hit.
Gov. John deJongh Jr. didn't mince words in a Monday news release. He said the bill would undermine the agreement that was reached to build the Diageo rum distillery on St. Croix, and would force the payment of V.I. rum revenues to Puerto Rico. Diageo plans to manufacture Captain Morgan rum at its St. Croix plant.
"The efforts of the Puerto Rican resident commissioner smack of politics and are grounded in fundamental misrepresentations regarding the use of the cover-over revenues," deJongh said.
Pierluisi, in a statement on his website, said his bill seeks to prevent the Virgin Islands from using the funds it receives under the rum-rebate program to provide "unreasonable" subsidies to rum producers.
Diageo's agreement with the local government calls for the government to float up to $250 million in bonds to pay construction costs. The bonds will be paid back out of projected excise taxes from the sale of rum sold on the mainland. The federal government returns $13.25 of the $13.50 it collects in excise taxes on rum made in the territory to the Virgin Islands. Puerto Rico collects rum-tax rebates on its rum at the same rate as the Virgin Islands.
Pierluisi's bill mandates that a subsidy to a rum producer of more than 10 percent of the rum-tax rebate may be deemed unreasonable if the U.S. Treasury concludes that it is "excessive" in relation to the total amount of cover-over funds, and that the subsidy has the effect of encouraging a rum maker to move production from one territory to the other territory.
"The purpose of the cover-over program is, and has always been, to help the two territories provide for the general welfare of their residents and to promote broad-based economic development," Pierluisi explained. "The program was not designed to enable a territory to provide overly generous subsidies to rum makers. This bill will reaffirm the laudable goals of the cover-over program by precluding the territories from using cover-over funds to provide unreasonable subsidies to their rum producers."
Pierluisi's statement alludes to the fact that Diego is leaving Puerto Rico to build a plant on St. Croix.
"Diageo has never operated a rum distillery in Puerto Rico, but rather had a supply agreement with a private distillery there," deJongh said. "As their contract was coming to an end in 2011, Diageo decided that Captain Morgan had grown to a point where it was time to own their own production facilities. Given the dominance of Bacardi in Puerto Rico, they chose to look elsewhere, notably in Central America. It was at that point they contacted us to discuss building Captain Morgan's future in St. Croix."
The deal with Diageo is consistent with the intent of the U.S. Congress in the creation of the cover-over program, the governor said.
"Every state in the union is charged with the obligation of building its economy to the benefit of its people, so too are we, and that is what we have done," deJongh said.
Delegate Donna M. Christensen said in a news release issued Monday that she is surprised at Pierluisi's bill, because no one is currently taking issue with the fact that the Virgin Islands and Puerto Rico receive the rum rebate from the federal government.
Further, she said that if it was determined that the "incentive" provided by the Virgin Islands to Diageo to build its plant on St. Croix was unreasonable, the cover over would be given to Puerto Rico.
The rum rebate puts about $80 million a year into the territory's coffers. That figure is expected to more than double after construction of the new Diageo distillery on St. Croix is finished in 2012.
Puerto Rico's resident commissioner post is similar to that of delegate to Congress.
Back Talk Share your reaction to this news with other Source readers. Please include headline, your name and city and state/country or island where you reside.