The National Puerto Rico Coalition is seeking a federal investigation of a rum-tax deal between U.K. spirit-maker Diageo PLC and the U.S. Virgin Islands.

The NPRC last week sent a request to the U.S. Justice Department and the Securities and Exchange Commission to investigate the agreement between Diageo, maker of Captain Morgan rum, and the USVI.

In July 2008, the territory agreed to issue, through the Virgin Islands Public Finance Authority, $250 million of rum-tax bonds to finance a distillery for Captain Morgan rum. In addition, the territory will allocate each year a portion of its rum-tax revenue to Diageo.

In return, Diageo in 2012 will move production of Captain Morgan from Puerto Rico to the Virgin Islands and stay there for 30 years.

Puerto Rico and the Virgin Islands receive $13.25 of the $13.50-per-gallon tariff that rum-makers pay to the U.S. Bacardi & Co. is the major rum producer in Puerto Rico. It has nearly $2 billion of outstanding rum-tax bonds issued through the Puerto Rico Infrastructure Financing Authority. The VIP­FA has $1.1 billion of outstanding rum-tax debt.

Puerto Rico estimates it will lose 350 jobs and $120 million of yearly rum-tax revenue beginning in 2012 once Captain Morgan leaves.

The Virgin Islands expect to receive $119 million of rum-tax revenue from Captain Morgan sales in fiscal 2012, with $36.3 million going to Diageo in the form of tax incentives, marketing campaigns, and molasses subsidies, according to Fiscal Strategies Group Inc. Those estimates increase annually.

“This is a sweetheart deal of such epic proportions that it should shock the conscience of every member of Congress” NPRC president Rafael Fantauzzi said in a statement. “The subsidy to Diageo is worth about twice the cost of its rum production. The cost of producing a proof gallon of rum in a Puerto Rico distillery is $3.07. Diageo stands to receive $6.38 in direct payments for producing the same rum.”

In response, USVI Gov. John deJongh said the agreement with Diageo will create and retain much-needed jobs.

“We are protecting American jobs, and based on projected future revenues, we are avoiding government layoffs and have not had to cut back on essential government services,” deJongh said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.