NEW YORK (Bloomberg) — Diageo Plc, the world's biggest distiller, accused Bermuda-based rival Bacardi Corp. of "working behind the scenes" to sabotage US tax subsidies Diageo would receive for moving production of Captain Morgan rum to the US Virgin Islands from Puerto Rico.

London-based Diageo, in a 13-page press release, said Bacardi is lobbying to kill Diageo's deal to move production of the rum to St. Croix. If the agreement collapsed and Diageo were forced to move outside the US, Bacardi and Puerto Rico would stand to reap "huge government subsidies" under a federal tax programme, Diageo said.

Bacardi, "which received tens of millions of dollars a year in annual government rum subsidies, has made a calculated decision to try to drive a competitor out of the United States even though it would be a disaster for the US citizens of the Virgin Islands", Guy Smith, executive vice-president of Diageo North America, said in the release.

Diageo stands to receive as much as $2.7 billion over 30 years in direct and indirect US tax incentives by producing Captain Morgan rum on St. Croix under an agreement with the US Virgin Islands government. A portion of the tax incentives involved in the deal were approved last year as part of a broader rescue of the financial system. That portion expired on December 31 and the US Senate may consider extending it this week.

Patricia Neal, a spokeswoman for Bacardi, said Diageo is dodging broader issues.

"This issue is about one point - the appropriate use of approximately $2.7 billion in taxpayer money," Neal said. "Diageo has some explaining to do to the US Congress and American people."

Bacardi has its headquarters in Catano, Puerto Rico, a San Juan suburb, and is incorporated in Bermuda.

At issue is the so-called rum cover-over programme, which rebates to Puerto Rico and the Virgin Islands most of a $13.50 excise tax on every so-called proof gallon of rum sold in the US. The levy has two parts: a permanent $10.50 federal tax dating to 1917 and a $3 additional tax, of which $2.75 is rebated. The second part of the tax expired and is under consideration to be renewed.

The rebate share is based on the proportion of rum produced in each territory. About 84 percent of it is produced in Puerto Rico, mostly by Bacardi and Ponce-based Destileria Serralles Inc., which currently manufactures Captain Morgan.

Diageo said it had already decided to move its production out of Puerto Rico and was considering other countries before it agreed to move to the US Virgin Islands.

When production of Captain Morgan moves to the Virgin Islands in 2011, Puerto Rico's share of the rebate will shrink more than if the rum were produced outside the US, according to a January report by the Congressional Research Service.

"Diageo's decision to produce rum in the USVI presents the worst-case scenario for PR because PR loses not only Diageo but also future excise tax revenue from USVI production," congressional researchers wrote in a report to lawmakers, referring to Puerto Rico.

Puerto Rico and the US Virgin Islands are in a lobbying battle over the future of the tax-rebate programme and Diageo's deal, in which the Virgin Islands would steer as much as 44.5 percent of the tax rebates to the company.

Puerto Rico's non-voting member of Congress, Pedro Pierluisi, has introduced legislation to limit the subsidies. Puerto Rico Governor Luis Fortuno is in Washington this week lobbying lawmakers on the issue.

"As public officials learn more details about the proposed deals in the Virgin Islands, they understand why it is bad economic and public policy to give billions in US tax dollars to individual companies," Fortuno said yesterday.