| 89 | The range of activities encompassed by the term 'tax services' is wide. Three broad categories of tax service can be distinguished. They are where the audit firm: |
| (a) | provides advice to the audited entity on one or more specific matters at the request of the audited entity; or |
| (b) | undertakes a substantial proportion of the tax planning or compliance work for the audited entity; or |
| (c) | promotes tax structures or products to the audited entity, the effectiveness of which is likely to be influenced by the manner in which they are accounted for in the financial statements. |
| Whilst it is possible to consider tax services under broad headings, such as tax planning or compliance, in practice these services are often interrelated and it is impracticable to analyse services in this way for the purposes of attempting to identify generically the threats to which specific engagements give rise. As a result, audit firms need to identify and assess, on a case-by-case basis, the potential threats to the auditor's objectivity and independence before deciding whether to undertake a proposed engagement to provide tax services to an audited entity. |
| 90 | The provision of tax services by audit firms to entities audited by them may give rise to a number of threats to the auditor's objectivity and independence, including the self-interest threat, the management threat, the advocacy threat and, where the work involves a significant degree of subjective judgment and has a material effect on the financial statements, the self-review threat. |
| 91 | Where the audit firm provides advice to the audited entity on one or more specific matters at the request of the audited entity, a self-review threat may be created. This self-review threat is more significant where the audit firm undertakes a substantial proportion of the tax planning and compliance work for the audited entity. However, the auditor may be able to undertake such engagements, provided that there is informed management and appropriate safeguards are applied to reduce the self- review threat to an acceptable level. |
| 92 | Examples of such safeguards that may be appropriate when tax services are provided to an audited entity include ensuring that: |
| the tax services are provided by partners and staff who have no involvement in the audit of the financial statements; |
| the tax services are reviewed by an independent tax partner, or other senior tax employee; |
| external independent advice is obtained on the tax work; |
| tax computations prepared by the audit team are reviewed by a partner or senior staff member with appropriate expertise who is not a member of the audit team; or |
| an audit partner not involved in the audit engagement reviews whether the tax work has been properly and effectively addressed in the context of the audit of the financial statements. |
| 93 | The audit firm shall not promote tax structures or products or undertake an engagement to provide tax advice to an audited entity where the audit engagement partner has, or ought to have, reasonable doubt as to whether the related accounting treatment involved is based on well established interpretations or is appropriate, having regard to the requirement for the financial statements to give a true and fair view in accordance with the relevant financial reporting framework. |
| 94 | Where the audit firm promotes tax structures or products or undertakes an engagement to provide tax advice to the audited entity, it may be necessary to adopt an accounting treatment that is not based on well established interpretations or may not be appropriate, in order to achieve the desired result. A self-review threat arises in the course of an audit because the auditor may be unable to form an impartial view of the accounting treatment to be adopted for the purposes of the proposed arrangements. Accordingly, this Standard does not permit the promotion of tax structures or products by audit firms to entities audited by them where, in the view of the audit engagement partner, after such consultation as is appropriate, there is reasonable doubt as to whether the effectiveness of the tax structure or product depends on an accounting treatment that is well established and appropriate. |
| 95 | The audit firm shall not undertake an engagement to provide tax services wholly or partly on a contingent fee basis where the outcome of those tax services (and, therefore, the amount of the fee) is dependent on the proposed application of tax law which is uncertain or has not been established. |
| 96 | Where tax services, such as advising on corporate structures and structuring transactions to achieve a particular effect, are undertaken on a contingent fee basis, self-interest threats to the auditor's objectivity and independence may arise. The auditor may have, or may appear to have, an interest in the success of the tax services, causing the audit firm to make an audit judgment about which there is reasonable doubt as to its appropriateness. Where the contingent fee is determined by the outcome of the application of tax law which is uncertain or has not been established, the self-interest threat cannot be eliminated or reduced to an acceptable level by the application of any safeguards. |
| 97 | The audit firm shall not undertake an engagement to provide tax services to an audited entity where the engagement would involve the audit firm undertaking a management role. |
| 98 | When providing tax services to an audited entity, there is a risk that the audit firm undertakes a management role, unless the firm is working with informed management. |
| 99 | Where an audited entity is a listed company or a significant affiliate of such an entity, the audit firm shall not undertake an engagement to prepare current or deferred tax calculations that are or may reasonably be expected to be used when preparing accounting entries that are material to the financial statements of the audited entity, save where the circumstances contemplated in paragraph 164 apply. |
| 100 | For listed companies or significant affiliates of such entities, the threats to the auditor's objectivity and independence that would be created are too high to allow the audit firm to undertake an engagement to prepare calculations of current or deferred tax liabilities (or assets) for the purpose of preparing accounting entries that are material to the relevant financial statements, together with associated disclosure notes, save where the circumstances contemplated in paragraph 164 apply. |
| 101 | Paragraph 99 is not intended to prevent an audit firm preparing tax calculations after the completion of the audit for the purpose of submitting tax returns. |
| 102 | For entities other than listed companies or significant affiliates of listed companies, the auditor may undertake an engagement to prepare current or deferred tax calculations for the purpose of preparing accounting entries, provided that: |
| (a) | such services: |
| (i) | do not involve initiating transactions or taking management decisions; and |
| (ii) | are of a technical, mechanical or an informative nature; and |
| (b) | appropriate safeguards are applied. |
| 103 | The audit firm's policies and procedures will set out whether there are circumstances in which current or deferred tax calculations for the purpose of preparing accounting entries are not prepared for non-listed audited entities as described in paragraph 47 of APB Ethical Standard 1. |
| 104 | The audit firm shall not undertake an engagement to provide tax services to an audited entity where this would involve acting as an advocate for the audited entity, before an appeals tribunal or court5 in the resolution of an issue: |
| (a) | that is material to the financial statements; or |
| (b) | where the outcome of the tax issue is dependent on a future or contemporary audit judgment. |
| 105 | Where the tax services to be provided by the audit firm include representing the audited entity in any negotiations or proceedings involving the tax authorities, advocacy threats to the auditor's objectivity and independence may arise. |
| 106 | The audit firm is not acting as an advocate where the tax services involve the provision of information to the tax authorities (including an explanation of the approach being taken and the arguments being advanced by the audited entity). In such circumstances effective safeguards may exist and the tax authorities will undertake their own review of the issues. |
| 107 | Where the tax authorities indicate that they are minded to reject the audited entity's arguments on a particular issue and the matter is likely to be determined by an appeals tribunal or court, the audit firm may become so closely identified with management's arguments that the auditor is inhibited from forming an impartial view of the treatment of the issue in the financial statements. In such circumstances, if the issue is material to the financial statements or is dependent on a future or contemporary audit judgment, the audit firm discusses the matter with the audited entity and makes it clear that it will have to withdraw from that element of the engagement to provide tax services that requires it to act as advocate for the audited entity, or resign from the audit engagement from the time when the matter is formally listed for hearing before the appeals tribunal. |
| 108 | The audit firm is not, however, precluded from having a continuing role (for example, responding to specific requests for information) for the audited entity in relation to the appeal. The audit firm assesses the threat associated with any continuing role in accordance with the provisions of paragraphs 109 to 112 of this Standard. |
| 5 The restriction applies to the first level of Tax Court that is independent of the tax authorities and to more authoritative bodies. In the UK this would be the General or Special Commissioners of HM Revenue & Customs or the VAT and Duties Tribunal. |
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