Diageo Calls Out Bacardi On Rum Tussle

Curtiss Gibson
Posted: February 24, 2010

The debate raging over Diageo’s agreement with the U.S. Virgin Islands for production of Captain Morgan rum escalated when Diageo NA released a 13-page missive earlier today that accuses Bacardi Ltd. of secretly leading the campaign to squash the deal. Diageo NA Executive Vice President Guy Smith says the “entrenched corporate interests of a wealthy family seeking to maintain their decades-long grip on rum subsidies” endanger the deal, which establishes the U.S.V.I. as the heart of Captain Morgan production and will generate an estimated $100 million in tax revenue annually for the island territory.

Diageo says that Bacardi currently receives tens of millions in cover-over funds from Puerto Rico for advertising—funds that will be far more adversely impacted with Diageo’s shift to the U.S.V.I. than if the company were to move Captain Morgan’s production outside the U.S., as it had been considering. The United States has long filled the coffers of its two rum producing territories via a rum tax. Each company that imports rum into the U.S.—even if produced outside of the territories—pays $13.50 in tax per proof gallon, of which $13.25 is distributed to Puerto Rico and the U.S.V.I. based on the percentage of their rum production. Puerto Rico has long reaped the lion’s share of those funds as its rum production has far outpaced the other territory’s. With Diageo’s move, the balance of power shifts, whereas if Diageo were to move its production outside of the U.S., Puerto would still receive a much higher percentage of those funds. Diageo uses this fact to argue in its release that the corporate entities and interest groups in Puerto Rico are searching for ways to maintain their own funds by hiding behind a veil of patriotism. “They don’t care if the U.S. loses jobs; they don’t care if they wreck the U.S. Virgin Islands Economy; they don’t care about the harm to U.S. citizens in the Virgin Islands,” says Smith.

Diageo also accuses Bacardi of backing the National Puerto Rican Coalition (NPRC), a group that has been critical of the deal and recently conducted a phone survey of 400 Puerto Rican voters in Florida asking them whether they believed it was wrong for the U.S.V.I. to deal with Diageo. The NPRC sent a release saying that a majority of those Florida voters said this issue would be a primary factor in which candidates they would choose to support. Meanwhile, Diageo voiced concern as to why politicians from other states and the federal government are being encouraged to intervene in a matter between the company and the U.S.V.I. Diageo also points to a Congressional Research Service report that finds the agreement between the U.S.V.I. and Diageo is a legitimate usage of the cover-over program, yet Puerto Rico representative Pedro Pierluisi introduced a bill in the House of Representatives that would introduce a cap on the cover-over funds a territory can return to a company at 10%. The result of such a bill would retroactively invalidate the deal between Diageo and the U.S.V.I.

Bacardi responded to Diageo’s accusations with a brief release. “This issue is about one point—the appropriate use of approximately $2.7 billion dollars in taxpayer money. This isn’t about where Diageo receives a free distillery, but about the proper use of federal tax dollars. Diageo has some explaining to do to the U.S. Congress and American people,” says Patricia Neal for Bacardi. Furthermore, the NPRC issued an open letter to President Barack Obama stating that the deal might open the U.S. to investigations by the World Trade Organization.

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