SAN JUAN, June 18 (Reuters) - A $250 million bond issue the U.S. Virgin Islands Public Finance Authority plans to bring to the municipal market next week is the latest sally in a Caribbean rum war with Puerto Rico over federal tax rebates.
The issue will finance a $165 million rum plant in St. Croix and related expenses for drinks giant Diageo PLC (DGE.L), which will shift production of its Captain Morgan Rum from Puerto Rico to the USVI after a contract with Puerto Rican rum producer Destileria Serralles runs out in 2012.
Underwritten by JPMorgan and Citi, the deal includes $80 million to $100 million annually in benefits for the firm, or about half the USVI’s anticipated annual take from a federal rebates program the two U.S. territories share.
Coming when Puerto Rico is battling recession and big government budget gaps, Diageo’s move will cost the U.S. commonwealth some $130 million annually in rum rebates. Last year, Puerto Rico received $370 million and the U.S. Virgin Islands $80 million under the program.
In response, Pedro Pierluisi, Puerto Rico’s resident commissioner, or nonvoting representative to Congress, proposed legislation seeking to establish a special rule blocking Puerto Rico and the Virgin Islands from using rum rebates to provide “unreasonable” subsidies to rum producers.
The bill defines an “unreasonable” subsidy of more than 10 percent of the rum rebate funds a jurisdiction receives.
“The program was not designed to allow a territory to portion out excessive subsidies to rum manufacturers,” Pierluisi, a Democrat, said in an interview.
Critics of Pierluisi’s bill said sparking a battle over the rum funds may only jeopardize the whole program.
“There is no issue with the rum program up here, and to raise it at a time, when the country is in deficit and people are looking for money everywhere, just puts the whole program at risk,” Virgin Islands Delegate Donna Christensen, a Democrat, said in an interview.
VI Governor John P. deJongh Jr called Pierluisi’s bill an “ill-conceived” attempt to undermine the agreement with Diageo and said Pierluisi’s efforts “smack of politics.”
DeJongh also said in a written statement that Puerto Rico was more interested in stopping Captain Morgan’s move to St. Croix than in keeping its production in Puerto Rico.
“Puerto Rico would be financially better off if Diageo built the home of Captain Morgan in Guatemala, or Honduras, or Trinidad. In fact, because of the way the federal excise taxes are shared, Puerto Rico would be largely indifferent to Captain Morgan continuing to be produced in Puerto Rico, or if it were to go anywhere else in the Caribbean, anywhere, that is, except for the Virgin Islands,” the governor said.
Puerto Rico and the Virgin Islands also split the excise tax on rum produced in Caribbean Basin countries, which is determined by their share of the U.S. market. Puerto Rico now has an 86 percent share to a 14 percent share for the Virgin Islands. But after the move, it will change to roughly 60 percent for Puerto Rico and 40 percent for the Virgin Islands.
The U.S. House Ways & Means Committee is not expected to act on the bill. (Additional reporting by Michael Connor in Miami; Editing by Jan Paschal)