Many observers have been puzzled by the €235m tax credit which NAMA showed for the first time yesterday in its Annual Report. Not only was such a credit omitted from the provisional 2011 accounts, but the booking of the credit at this stage presupposes that NAMA makes profits in the future – which it may, though with a deteriorating loan book and asset values declining in its primary market, that is not assured by any means – and there have been suggestions that NAMA is incorrect to book such a credit as it is not subject to corporation tax. The effect of the €235m tax credit was to bolster the marginal pre-tax profit of €11m to the €247m reported across most media – I say a “marginal” pre-tax profit because any accountant worth their salt can tweak provisions and estimates and in the context of a €30bn business, finding €11m extra of profit or a €11m reduction in losses or provisions shouldn’t be a gargantuan challenge. This blogpost examines the tax credit in more detail.
Firstly although section 214 of the NAMA Act states that NAMA is not subject to corporate or income taxes, that provision appears not to apply to NAMA group companies. This one sentence section 214 might benefit from further investigation as presumably NAMA is subject to taxes in other jurisdictions, and it is not clear why NAMA group companies would not benefit from this provision.
In the 2010 annual report, there was a tax charge of €375,000 – when rounded to the nearest €m it becomes zero and that is why it was not immediately obvious in the NAMA press release of key financial data yesterday – and, according to Note 11 of the 2010 final accounts “the tax charge arises on the profits earned by NAMAIL. A total amount of €0.34m was paid to the Revenue Commissioners in the period which relates to 12.5% of the profits arising in NAMAIL. No other tax charges arose in other NAMA Group entities and the Agency is exempt from Irish income tax, corporation tax and capital gains tax.”
In 2010, there was a tax charge also in the provisional accounts of €380,000 so the charge of €375,000 in the final accounts for 2010 didn’t come as a surprise. In 2011 however, there was no provision whatsoever for tax and yet in the final accounts, there was a whopping big €235m credit.
NAMA has thus far run up a stonking big loss and when it comes to the taxation of companies, they can carry forward a loss from one year to offset against profits in a future year. So simplistically speaking, if Company A makes a loss of €1,000 in 2010 and a profit of €1,500 in 2011, then in principle Company A can offset the €1,000 loss from 2010 against the 2011 profit, and only pay corporation tax on the cumulative profit of €500. So Company A in 2010 won’t pay any tax in that year, but will Company A estimate the future benefit of the loss it has made in that year? If Company A is confident it will make future profits then it may book a “tax credit”, but you would have to ask why? If 2010 was its first year of operation, then it wouldn’t get paid a refund of tax from the Revenue Commissioners. The only reason you would publish a tax credit, it seems, is optics.
NAMA says it is confident of generating profits in future years so that the “tax credit” it has recognised in 2011 can really be used to offset any tax liability.
The view on here is the “tax credit” was recognised now purely for optical reasons, and that given the precarious condition of NAMA’s main market, Ireland, it flies in the face of the accounting concept of prudence to recognise the “tax credit” in these circumstances.