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Captain Morgan may set sail for tax benefits

The rum brand's parent firm, Diageo, would receive advantages worth $2.7 billion under a deal to move production to the Virgin Islands from Puerto Rico.

September 02, 2009|Tom Hamburger and Peter Wallsten

WASHINGTON — Yo ho ho and a bottle of rum.

With little fanfare, a deal is moving forward to provide billions in tax dollars and tax breaks to an unlikely beneficiary -- the giant British liquor producer that makes Captain Morgan rum.

Under the agreement, Diageo in London will receive tax credits and other benefits worth $2.7 billion over 30 years, including the $165-million cost of building a state-of-the-art distillery on the island of St. Croix in the Virgin Islands, a U.S. territory.

Virgin Islands officials say the arrangement complies with the letter and spirit of tax law and will help the islands' sagging economy.

Captain Morgan is now produced in the U.S. commonwealth of Puerto Rico, and critics say the Virgin Islands' subsidy for the new distillery, along with the other benefits, is so generous that it practically guarantees a profit on every gallon of rum produced there by Diageo, the biggest distilled spirits maker in the world.

"The U.S. taxpayer is basically being asked to line the pockets of the world's largest liquor producer," said Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan watchdog organization.

With the exception of Ellis and a handful of lawmakers, however, the deal has attracted little opposition in Congress or elsewhere.

Treasury Secretary Timothy F. Geithner has said he does not have authority to block or investigate the project. Criticism on Capitol Hill has been confined to a small group that includes Republican Reps. Dan Burton of Indiana and Darrel Issa of Vista, Calif., plus a handful of Democrats with large Puerto Rican constituencies.

The key to the deal is a tax collected on every bottle of rum sold in the United States -- some $470 million a year. The tax was first imposed in 1917, and most of the money is funneled back to the governments of rum-producing U.S. islands in the Caribbean to help create jobs, pay for local government services and promote consumption of rum.

Puerto Rico, which requires that 90% of its rum tax money be used for the public welfare on the island, says that it has had as many as 300 workers making Captain Morgan and that many if not all those jobs will disappear if Diageo moves its operations to the Virgin Islands.

"It's insulting that the money we give is essentially paying for a foreign corporation to move from one U.S. location to another, while cutting jobs," Ellis said.

Virgin Islands officials say the deal, although consuming a good portion of the islands' rum tax dollars, will bring 40 to 70 jobs and some much needed financial stability to their suffering economy.

The Washington lawyer who helped Diageo negotiate the Virgin Islands agreement, John Merrigan of the firm DLA Piper, says government inducements are often provided to attract a new employer to a location needing economic development. He cited concessions granted by Tennessee and South Carolina to encourage foreign automakers to locate plants in their states.

And Diageo officials say that, contrary to Puerto Rico's claim that the deal will result in a net loss of jobs, it actually will save jobs. The company said it would probably have moved its operations to Guatemala, Jamaica or another country if the Virgin Islands hadn't offered the favorable terms.

The offer "helped us decide to stay in the U.S.," said Zsoka McDonald, Diageo's director of media relations. "There is risk and reward on both sides, and both parties concluded it was a fair deal."

The Virgin Islands government will finance the new $165-million distillery by issuing bonds that will be paid off with future rum tax dollars. In addition, the 30-year agreement provides almost $2 billion in marketing subsidies and a break on property and income taxes, although the company will accept reduced subsidy payments until the construction debt is repaid, Merrigan said.

Legislation to limit the agreement was offered in April by Puerto Rico's representative in the U.S. Congress, Rep. Pedro R. Pierluisi, a Democrat. But his proposal, which would cap subsidies to the industry at a maximum of 10% of total rum tax revenue, has picked up only a handful of cosponsors.

House Ways and Means Chairman Charles B. Rangel (D-N.Y.) has refused to intervene in the dispute, citing his long-standing support for the rum tax program, which gives territories the right to determine how the funds will be used.

Burton, who is on a fact-finding trip to the region this week, said he was supporting Pierluisi's bill "because there needs to be a vehicle for intervention when unreasonable subsidies are given to foreign companies at taxpayer expense."

Roberto Serralles, whose family owns the Puerto Rico distillery that currently produces Captain Morgan under contract to Diageo, said other brands would find it hard to compete with Captain Morgan on price.

"We're going to be competing with producers in the Virgin Islands that will have no cost," he said.

In the end, the two Caribbean territories might get into a trade war over who could give rum makers the biggest rewards, said Javier Vazquez, executive director of Puerto Rico Industrial Development Co, a government-owned company dedicated to promoting the island.

Bacardi, another huge producer, still has a large operation in Puerto Rico.

"This is going to be a race to the bottom," Vazquez said.

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tom.hamburger@latimes.com

peter.wallsten@latimes.com

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