‘Factoring’ pushed for $121.4M delinquent taxes owed gov’t

Sen. Celina R. Babauta (D-Saipan) is proposing that Gov. Arnold I. Palacios implement “factoring,” which she believes can be a potential solution to collect a significant portion of delinquent taxes owed the CNMI government, estimated at $121.4 million as of July 2023.

Babauta said in his letter Thursday to Palacios that utilizing a financial instrument called “factoring” will unlock immediate cash flow and improve the government’s financial health.

She said she is confident that this approach, if implemented transparently and responsibly, can contribute to a stronger fiscal future for the islands.

Babauta said factoring is a financial transaction where a third-party “factor” purchases outstanding invoices or receivables at a discount. The “factor” then assumes the responsibility of collecting payment from the debtor.

She said there are two types of factoring: Factoring with recourse and factoring without recourse.

Babauta said each approach has its own advantages and disadvantages, which must be carefully considered.

Factoring with recourse involves the government selling its delinquent receivables to the “factor” at a discounted rate but retains the risk of non-payment. If the “factor” is unable to collect the debt from the taxpayer, the government may be required to repurchase the receivable.

Babauta said factoring with recourse provides for a higher advance rate for the government, faster cash flow and typically lower upfront costs.

She said some of the disadvantages of this approach include the government retaining the risk of non-payment and a potential for additional costs if debts remain uncollected.

Factoring without recourse, on the other hand, transfers the full risk of non-payment to the “factor.”

She said the “factor” purchases the receivables at a deeper discount, but the government is not responsible for any uncollected debts.

Under this factoring without recourse approach, the senator said, the risk of non-payment for the government is eliminated, and it provides immediate access to cash, and can improve government credit-worthiness.

Babauta said its disadvantages include a lower advance rate, higher factoring fees, and slower implementation process.

She underscored the need to conduct a thorough analysis of the delinquent tax receivables and this includes categorizing the debts by age, type, and taxpayer profile to assess the potential for collection.

The senator added that it is critical to develop a clear and transparent Request for Proposal outlining the terms and conditions for factoring.

“This should specify the types of receivables to be included, the desired advance rate, fee structure, and risk allocation,” Babauta said.

She said there is a need to evaluate proposals from reputable “factoring” companies—usually banks or other financial institutions and possibly the Commonwealth Economic Development Authority.

In negotiating the final terms of the factoring agreement, Babauta said, it must be ensured that the agreement aligns with the government’s best interests and balances the risks and benefits of each approach.

Babauta said in implementing the factoring program, its performance must be monitored, track collection rates, expenses, and overall impact on government finances.

She believes that “factoring,” with careful planning and execution, can be a valuable tool for the government to recover a significant portion of its outstanding tax receivables.

The senator said it can provide immediate access to cash to fund critical priorities, improve the government’s financial standing, and reduce the burden of long-term debt.

In his Fiscal Year 2023 Annual Report submitted to the Legislature last month, Palacios disclosed that to date, the Tax Collection Task Force that was formed in July 2023 has been executing installment agreements and recovering approximately $8 million.

Since launching this task force in July 2023, Palacios said, the Department of Finance has brought 226 taxpayers into compliance.

He said the Tax Collection Task Force’s efforts continue in fiscal year 2024, and they expect further improvements in taxpayer compliance and government collections in the months ahead.

In order to increase the anticipated revenues of the CNMI in fiscal year 2024, Finance formed the task force upon Palacios’ proposal to aggressively collect taxes due in the past 10 years.

In July 2023, Finance Secretary Tracy B. Babauta disclosed to the Senate Fiscal Affairs Committee that Finance has $121.4 million in total outstanding collectibles from account receivables from the past 10 years, including $30 million in employee quarterly withholdings that were not remitted by employers.

Celina R. Babauta