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Puerto Rico’s cash-strapped government has been losing money through a rebate it gives its rum companies to compete with U.S. Virgin Island distillers, while the rum companies are enjoying an unprecedented cash windfall from it, according to a new report by the Centro de Periodismo Investigativo (Center for Investigative Journalism).

The report, "Puerto Rico’s Unlimited Generosity Towards Rum Companies," finds that an amendment to the island’s Internal Revenue Code made during the administration of Gov. Luis Fortuño (2009-2013) increased the rebate rum companies receive from 10 percent to 40 percent.

The report states that the island has missed out on hundreds of millions of dollars in revenue in just the last few years, $434 million since 2011 alone, while rum companies are flush with cash. They also found that while rum companies have increased production in Puerto Rico by 11 percent in the last several years, the companies pay 18 percent less in taxes to the island government.

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The rebate works in this way: the United States government reimburses the island government for a tax Puerto Rico pays on rum produced on the island, which is sold to the U.S. mainland. The island government then gives a portion of that rebate back to the rum companies.

In 2007, the U.S. Virgin Islands started offering incentives to increase rum production there and lured the brand Captain Morgan from Puerto Rico to the USVI in 2008. Puerto Rico answered with an increase in rebates to rum companies, which has cut into revenue used by the government for economic development programs, infrastructure, and other government operations and for paying its public employees, who represent 26 percent of the island workforce, according to report by the journalism center or CPI in Spanish, an independent, non-profit group founded in 2008 in San Juan.

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The biggest beneficiary of the rum rebate change has been Bacardí, the world’s largest rum producer. Bacardí told the researchers that the rebate is important and that it uses those funds for marketing and production, including modernizing and renovating several facilities on the island.

"We had no intention of leaving Puerto Rico, but the changes prevented the (Bacardí) operations from being affected by the unfair competition posed by the attractive incentives offered by the U.S. Virgin Islands to rum producers," Eduardo Vallado-Moreno, Bacardí's regional vice president of supply and manufacturing for the Americas, told the CPI.

Island economist Ramón Cao, cited in the report, disagrees. “These incentives are a bad idea. It is a zero-sum game where in the end the players are worse off because who benefit are the industries that take the money that is supposed to be used to repair roads, build hospitals, and pay the teachers, which are the things a government should do,” Cao said.

The rum rebate investigation was released while the island is in the throes of a crushing debt of more than $70 billion and an ongoing financial crisis so dire that Puerto Rico Gov. Ricardo Rosselló – in office just a month – has warned the government will run out of money to pay its public employees this month.

The Rosselló administration says it will review the rum rebate system and could consider amending it or eliminating it altogether.

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