Puerto Rico is feuding with the United States (US) Virgin Islands over its neighbour's luring away business by using revenue from a tax paid by US consumers on every bottle of rum produced in the two Caribbean territories.

The US Treasury Department sends all but 25 cents of the US$13.50 in federal excise taxes levied per proof gallon of rum produced in Puerto Rico and the Virgin Islands to the territorial governments to spend on infrastructure and public services.

Both cash-strapped territorial governments are struggling to create jobs on their islands.

Long-term lease

In January, the liquor company Diageo PLC signed a long-term lease to build a Captain Morgan rum distillery in the Virgin Islands in exchange for a chunk of that territory's excise tax revenue - some US$2.7 billion over 30 years, according to an estimate provided by Puerto Rico's government.

Puerto Rico's non-voting delegate to Congress, Pedro Pierluisi, complained Thursday that the Virgin Islands is unfairly using its share of the excise tax to lure Diageo to move its rum operations from Puerto Rico.

In an email, Pierluisi said he has drafted a bill to set a "reasonable limit" on the tax revenues that Puerto Rico and the Virgin Islands can use to subsidise private rum companies and avoid "unfair competition."

"I am willing to be flexible," said Pierluisi, who has been joined by three other House Democrats of Puerto Rican descent lobbying for a cap. "The limit imposed does not have to be the 10 percent cap contained in my bill."

Political leaders in the Virgin Islands are fighting back, accusing Puerto Rico of spreading misinformation in trying to thwart a private-sector decision by Diageo.

The Virgin Islands non-voting delegate to Congress, Donna Christensen, and the terri-tory's governor, John P. deJongh Jr, met this week with House Speaker Nancy Pelosi and other US leaders to criticise Puerto Rico's lobbying efforts and explain their economic strategies.

Threat to economic growth

"Rather than let a small faction threaten the Virgin Islands' future economic growth, we are making sure that Speaker Pelosi and other members of Congress know the truth," DeJongh said in a statement Thursday.

"That includes shedding light on the truth of why Diageo chose to end its supply relationship in Puerto Rico and has now chosen to build its home in the Virgin Islands."

Diageo has said it plans to start making rum on St Croix in the Virgin Islands in 2011 at a plant that will supply all the rum used to make Captain Morgan-brand products for the US market.

The deal to rebate federal excise taxes on rum from the US tropical territories dates back to a 1917 act of Congress.

- AP