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Fiscal Cliff Deal: Diageo Wins; You, Caricom lose


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Hi all,

Some depressing news I'm afraid: last night's tax deal (Sec. 329) extended the subsidy to bulk rum producers organized in Puerto Rico and USVI, despite the abuse of the cover over program.

I.e., Diageo Plc of London, UK will continue to be refunded almost half the excise tax collected on every bottle of Captain Morgan rum sold in the U.S., while you pay 100% of the excise to the U.S. Treasury.

This is especially unfair to the Caricom community, who have been trying to fight this illegal and unfair trade subsidy.

Nothing for craft distillers I'm afraid.

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This has been unfairly reported as 'pork,' and the post above misrepresents it as well.

This really has nothing to do with the 'fiscal cliff.' It's a program that has been in place for years and was simply continued. As far as the taxpayer is concerned, it simply takes money that would go into the national treasury through the FET and lets the U.S. possessions where spirits are produced put that same amount into their own treasuries instead. It's a way of getting money directly into the treasuries of those possessions. It has no impact on the taxpayer, as the tax burden is identical regardless of the beneficiary, and the program itself isn't a benefit to the producer (i.e., Diageo). The non-U.S. members of Caricom object to the way USVI is using the program to lure producers away from other jurisdictions, but that has nothing to do with the legislation that passed the other night.

People who are demogoging this either don't understand it or are deliberately mischaracterizing it to score some cheap points.

If there's anything 'depressing' about it, it's that.

That said, I won't object if a mod wants to delete or move this whole thread, as it has zero to do with U.S. microdistilleries.

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Really ? It is my understanding that the USVI is refunding 40% of the rebate / carry over/ diirectly back to Diaego, plus they get a 90% reduction in their income tax. I don't quite understand how a competitor who get a 40% rebate on his production tax, plus a 90% reduction on Income tax, does not negatively affect or competitively disadvantage US micro distillers. But then I'm just a country boy, and don't really understand all them high falutin figures.

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Chuck, what did I say that was misrepresentative?

I specifically said it extended the subsidy; I made reference to the ongoing fight. So I don't think anyone could figure from my post that this was something new.

Also, the subject line of my post was "Fiscal Cliff Deal". Of course the cover over program had nothing to do with the tax rates paid by Americans, which makes it all the more remarkable that the tax-extender provision for cover-over made it into the legislation. And again, I specifically said "refunded" the excise tax.

Chuck, a question for you: is Rep. Pierluisi (D-PR) demogoging because he doesn't understand the issue, or because he's trying to score cheap political points?:

Nobody had said a word about excise taxes and rum on the floor of the House or the Senate in the two years since the provision was renewed the last time.

“I keep saying, let’s take the occasion to reform it,” said Pedro Pierluisi (D), Puerto Rico’s nonvoting representative in Congress. Pierluisi believes that too much of this money gets funneled back to rum distillers instead of being used for economic development. “It didn’t happen this time around.” [
]

Finally, for you to say that cover-over has no bearing for U.S. craft distillers is puzzling, as Roger perfectly put it above. I'd add that besides Captain Morgan and Cruzan, this subsidized rum is also being sourced by private-label bottlers, some of whom have no problem problem using terms like "hand crafted" to go after the exact same customers that micro-distillers are trying to reach. I stand by my comment that it's depressing news that of all things to be included in the fiscal cliff deal, this almost universally disfavored and unfair subsidy found a way.

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What I have going for me is that I don't have a dog in this fight. I'll accept 'spin' rather than 'misrepresentation,' and yes, Pierluisi is demagoging in that he's spinning by using the word 'reform,' when he's really speaking on behalf of Puerto Rico's self-interest. I've entered this not with a point-of-view but just in an effort to illuminate the issue honestly for participants here who aren't directly involved in it, because I so often see it misrepresented.

I will say that any craft distiller who thinks his or her competition is Captain Morgan needs to revisit his or her business plan.

Here's a very good, objective explanation of what happened earlier this week from today's Shanken News Daily. My point is that the controversy is about the wrinkle USVI added with the subsidy to Diageo. Just because there are winners and losers doesn't necessarily mean there's anything 'unfair' about what's being done. Here's the Shanken thing:

"The legislation signed by President Obama on Wednesday to avert the so-called 'fiscal cliff' extended rum cover-over subsidies to U.S. territories like Puerto Rico and the U.S. Virgin Islands at a rate of $13.25 per proof gallon through the rest of this year. The rate had been cut to $10.50 a proof gallon beginning January 1, 2012, but lawmakers have now made the more generous rate retroactive to then. The rum cover-over program returns most of the $13.50-per-proof-gallon federal excise tax on rum collected from U.S. territories for economic development. The program, which has been in effect since before Prohibition, has come under increased scrutiny in recent years, as the U.S. Virgin Islands lured Diageo’s production of Captain Morgan from Puerto Rico by agreeing in a 2008 deal to share a significantly larger portion of cover-over funds with the drinks giant than it was receiving in Puerto Rico."

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Chuck, the Diageo - USVI agreement is a WTO Prohibited Local Content and Export-Contingent Subsidy. It's precisely the kind of thing the United States promised not to do when Congress passed the Uruguay Round Implementation Act, and took on the responsibilities of WTO Membership. The U.S. government is accountable for the Diageo - USVI Agreement because the Secretary of the Treasury has to sign off on the disbursement of Cover Over funds, which are now contractually obliged to Diageo and Cruzan.

In short, it's unfair because the government (not a politician, but the government en masse) is doing something it promised not to do.

Now, I've criticized the program, but you put all those who are critical of the program into one of two camps: uninformed or liars ("deliberately mischaracterizing"). After this ad hominem, you go on to say that you "don't have a point of view" but then offer the subjective viewpoint that cover-over is of no concern to any U.S. micro-distiller. Now, the best internet forums are home to substantive debates and differing perspectives, but making the argument about oneself (or the person presenting the argument) does nothing to contribute to the reason the forum is visited in the first place.

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I'm very sorry if I gave that impression and I've appreciated how you, unlike some on this forum, have handled this discussion like an adult. Obviously, Caricom can complain to the WTO, which will sanction the U.S. if it feels that's appropriate. I certainly didn't intend to characterize anyone who objects to how USVI is using the cover-over program as either uninformed or a liar, but I am critical of a lot of the coverage, including the tone of your original post, which tends to create a false impression among people who are uninformed. Posting about this here and now just because of the events earlier this week is opportunistic. Nothing wrong with that, but Congress and the President didn't do something unfair this week. How USVI is using the program, and the failure of the federal government to prevent them from doing it if it is, in fact, inappropriate wasn't in any way affected by this week's events. You used it as a jumping off place to call attention to your position. Nothing wrong with that. I just want to inject a little background and balance.

And does this kind of big money political maniupulation significantly harm American craft producers? Not really. The participants here are playing in a completely different arena.

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As with politics, all markets are local. It matters little that a big company is far far away, when they can sell their product in your backyard with perhaps an unfair financial advantage. When we begin to believe that problems are just too large to tackle, or companies are so protected by politicians that they can't be touched, we are little more than sheep. And sheep don't make good business people, nor do they often succeed.

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I've found this whole thread very informative. I had wondered about the "rum subsidy" since hearing about it on CNN.

I do think this cover-over as it's called represents an unfair advantage to the big rum producers in PR and USVI. That is something that should concern any competitor (rum producer) no matter how small. The PR and USVI producers get extra government support and cash back directly making their products more profitable or subsidizing the product allowing it to be produced cheaper. This makes everyone else's product more expensive and therefore less competitive. I understand that it's been going on since 1917 but that doesn't mean it's any less upsetting or in my opinion un-American.

Link to Congressional Research Report on it http://www.hsdl.org/?view&did=719414.

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If your town offers tax breaks, subsidized services, free land, or other incentives to get the big XYZ factory to locate there instead of someplace else, making their products more profitable or subsidizing the product allowing it to be produced cheaper, is that unfair and un-American? It's the same thing. If you give your best customers a 15% discount for buying more than, say, 50 cases of your product, making their stores more profitable, is that unfair and un-American?

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Resoundingly YES !!! If a government agency, be it local, county,state, fed, etc... gives an advantage to one company vs. another, it is absolutely wrong. It may not be "un-American, in so far as it seems to be the status quo. Our governments and Authorities have so degraded out ability to compete in the world market by making manufacturing so difficult here, that there seems to be little choice but to hire even more "government or quasi government" bloated shirts to help offset the burdens imposed by their brethren. But this should not be for US companies who do not export over 50% of their production.

In fact each and every time a company is given an advantage over another, said advantage should automatically carry across the entire industry nation wide, so that no company is enticed to operate, expand, move or locate for what amounts to little more than passing their burden onto someone else.

One could write an Excel program to eliminate the entire rediculous industry of Industrial Development Agencies in less than 8 hours, by merely compiling the deals given across the county for every industry, and hitting V-Lookup, to offer the same deal to any company who answers 10 drop down menu questions.

What a joke, giving preference to any private enterprise !

As for an individual "company" giving a discount to a customer for bulk purchase, that's the whole idea of "private enterprise". Oh but wait, I am sure there is a government form for that :)

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The (Federal) government is not a private entity but a public one and shouldn't play favorites among its citizenry. Providing unfair advantage to multi-billion dollar corporations is totally un-American (even if common). It's not how I want to see my government act. I don't have issue with businesses in actual need/startups getting some form of subsidy for a limited time but overall these things tend to go to the big guy and roll on from year to year. If this was the USVI acting on it's own I don't think we could say much except that "Is that really the best use of public funds?" but then it's a local issue. The problem is the pseudo Federal Government approval of it because they give that money to the local government making it a national issue.

This post is also in a forum meant for people who are competitors in some form to these businesses and receive no such special treatment.

If the craft industry could get a lobby going perhaps it could get similar deals and we wouldn't be complaining. Does the ADI lobby really?

P.S. in the process of writing my response Roger posted GOOD POST!

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  • 3 months later...

With respect to all, this issue is not all that easy to digest. Were all distillers given incentives in equal measure it might - might - be more palatable, but that is far from the case. Over the many years the cover over returns were gradual, but things changed greatly perhaps 10 years ago. At this point the return of tax dollars to the USVI and PR were used for the general public good and for general promotion of rum. That changed when monies started being funneled to Bacardi. Thus a vicious circle was established - all Caribbean rums imported paid taxes, but the USVI/PR got them back and were able to produce more rum, more cheaply, capture more shelf space, influence more distributors and... get more money back.

A viscious cycle. Then things got really bad when the USVI recently cut a multi billion dollar deal first with Diageo, and then with Fortune. This was so sweet that Diageo actually gets back about double the cost of the spirit produced. Fortune got free facilities and the ability to buy molasses at a guaranteed 12 cents/gallon compared to the market price of about $2.00/gallon. Diageo gets obscene benefits - available to no Caribbean rum, or to any small US distillers - for the next 30 years, renewable for another 30 years.

Enough for now: here's a nice quote and citation that indicate that these US subsidies to a British company have the very real potential of really hurting US farmers as well.

The Daily Caller: "In 2008, the U.S. Virgin Islands (USVI) entered a 30-year agreement (renewable for up to 60 years) with the British alcohol firm Diageo. In return for relocating its rum production facility to the USVI island of St. Croix, Diageo will receive almost half of the Virgin Islands’ rum tax money, a 90 percent income tax break, and a property tax exemption. The government will also build Diageo a new state-of-the-art distillery and guarantee — subsidize — sugar prices (sugar is a key ingredient in rum) for the next 60 years. The deal could be worth well over $6 billion to Diageo.

And it’s getting worse. According to domestic alcohol industry insiders, the USVI is now trying to convince domestic manufacturers to relocate their operations to the territory and purchase USVI bulk rum to blend into domestic alcohol products. This could destroy thousands of jobs throughout the Midwestern states as distillers move their operations to the Caribbean to take advantage of the tax breaks and subsidies. It could also cost corn producers 22 million bushels worth of demand, since corn is a major ingredient in domestic alcohol production.

Not only would such developments further line the pockets of private companies, but the resulting economic losses to the United States would be devastating."

Link: http://dailycaller.com/2011/05/17/why-is-congress-subsidizing-foreign-rum-producers/

We believe that all of us: US taxpayers, US distillers and farmers, and independent Caribbean rums ought to be concerned and in favor of a level playing field. It is certainly worth reflecting on all this and discovering what it all means.

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