30 August 2011

Puerto Rico House to probe rum industry incentives


By Caribbean Business Online Staff

(Puerto Rico) House Speaker Jenniffer González (has) introduced legislation...ordering an investigation into the government’s handling of the local rum incentives program amid complaints by Destilería Serrallés that the Fortuño administration has given Bacardi Corp. an unfair advantage over other producers in Puerto Rico.

House Resolution 1779 states that Law 178, the new rum incentives law, calls for the government to take the needed actions to make sure the rum industry remains strong and retains jobs amid a rum war with the U.S. Virgin Islands.

“Nonetheless, there have been stories denouncing that the incentives granted by Economic Development & Commerce Department (DDEC) to liquor distillers has not been equal for all of the companies,” the resolution reads.

CARIBBEAN BUSINESS has reported that DDEC Secretary José Pérez-Riera has refused to grant Destilería Serrallés an incentives package similar to the one granted to Bacardi Corp. through a deal in February. Serralles President & CEO Felix Serrallés has complained that DDEC agreed to give Bacardi 46 percent of federal rum rebate revenues generated by its rum sales starting in July 2012. The DDEC has offered Serralles 25 percent of federal rum rebate funds on its bulk rum sales, the lion’s share of its business, and 46 percent on its bottled-rum sales.

The local incentives were launched against the backdrop of a rum war between Puerto Rico and the USVI. That fight was sparked by the USVI’s move to grant huge incentives based on federal rum rebates to British-liquor giant Diageo to start producing there.

Diageo’s Captain Morgan rum has been made under contract by Serrallés, but production is being moved to St. Croix after Diageo landed the incentives from the USVI, including a new cutting-edge distillery. While Diageo’s departure will affect Puerto Rico’s entire rum industry because of the potential decrease in federal rum rebates, a government study conducted by Applied Research says Serrallés will be hurt most, since it will lose as much as 70 percent of its sales volume.

The contract with Bacardi includes other benefits, such as $95 million to refurbish its Cataño plant and expand its aging warehouse.

In return, the company has to maintain a minimum level of production in Puerto Rico for the next 20 years, an agreement that translates into more than $230 million in yearly revenue for Puerto Rico through federal rum excise taxes, according to Economic Development & Commerce Secretary José Pérez-Riera.

Bacardi President Joaquín Bacardí has said he doesn’t sell bulk rum other than to Trigo Corp. and Edmundo B. Fernández, the latter which makes Barrilito rum.

Pérez-Riera told Serrallés in a letter that if Bacardi were ever to compete in the bulk-rum business with Serrallés, the DDEC would increase Serrallés’ incentives. A massive bipartisan tax package inked by President Barack Obama in December included the temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the U.S. Virgin Islands.

The temporary increase, which has been approved every year since the early 1990s, boosts the territories’ shares of federal rum taxes. Puerto Rico and the U.S. Virgin Islands currently get $13.25 of the $13.50 tax slapped on each proof gallon of rum. Lawmakers must renew the increase or the rebate will drop back to $10.50.

The federal government returns most of the $13.50 per proof gallon tax on rum distilled in each territory and in foreign countries to Puerto Rico and the U.S. Virgin Islands. The territories keep the revenue produced in their jurisdiction, and taxes collected on foreign rum are split between the two jurisdictions based on their ratio of the U.S. market. That’s what makes the move from one territory to the other so painful: the U.S. Virgin Islands share of foreign tax rebates also goes up at Puerto Rico’s expense.

In 2008, Puerto Rico received about $370 million and the U.S. Virgin Islands some $80 million under the program. Puerto Rico currently has an 86 percent share to the U.S Virgin Island’s 14 percent, but after Captain Morgan’s move, the proportion will change to a 60 percent-40 percent split, according to industry experts.

The USVI government also entered into a similar deal that will use federal rum tax-rebate proceeds to finance $105 million in improvements to the Cruzan rum facilities on St. Croix and provide other benefits.

In response to the USVI moves, Puerto Rico passed legislation this year that gives the island government a range of tools to boost producers.The legislation increased from 10 percent to 25 percent the portion of the monies from the federal rum rebate that the island government can invest to provide incentives to and promote Puerto Rican rums. That amount had been capped at 10 percent by local legislation. In addition, it gives the government of Puerto Rico the ability to work directly with rum producers to develop incentives and promotional strategies that will enhance their competitiveness and, therefore, their potential for growth in the future.

The measure also gives the governor the discretion to increase this percentage up to 46 percent if the U.S. Congress does not impose, before December 31, 2011, a cap on the amount of subsidies that a U.S. jurisdiction can give a rum producer out of the federal rum excise tax cover-over program.

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