by Kubashni Moodley Tax Partner at PKF Durban

This article was first published in SAICA’s Accountancy SA Magazine (March Edition)

The International Ethics Standards Board for Accountants (IESBA) will introduce 2 new sections in the Code of Ethics (Code) to “ strengthen the ethical expectations for professional accountants [PAs] in business and in public practice when performing tax planning services”.

2 years in the making

The IESBA Board approved a project to develop revisions to their Code to address tax planning and related services in September 2021. After various discussions and global roundtables being held, the first proposed version of sections 280 and 380 along with an exposure draft which relate to PAs in business (PAIBs) and PAs in public practice (PAPPs) respectively, was released for comment on 17 February 2023.

SAICA, along with other controlling bodies locally and internationally as well as accounting firms world-wide participated result in a total of 50 submissions being made.

Following these submissions, a revised Code was issued in November 2023. According to the IESBA Meeting and Highlights document for December 2023 it is noted that the:

• IESBA board unanimously approved the revised Code;
• final pronouncement is expected to be issued mid-April 2024; and
• new sections will be effective for tax planning services beginning after 30 June 2025, with early adoption permitted.

Rationale for inserting of sections 280 and 380 into the Code

When the initial proposed exposure draft and new sections to the Code was released, it was noted on the IESBA website that “the proposed revisions to the Code addressing tax planning and related services respond to public interest concerns about tax avoidance and the role played by consultants, including professional tax advisers, in light of revelations in recent years such as the Paradise and Pandora Papers.”

During a webinar held by IESBA on 27 February 2023 relating to the proposed changes IESBA highlighted the need for guidance and codification to PAs providing tax planning and related services to guard the professional accounts against recent cases such as:

• Starbucks case where the tax arrangement entered into was legal but was seen as extreme tax avoidance resulting in the Starbucks brand facing years of public criticism; and
• Former PWC partner in Australia was banned for 2 years for sharing confidential information regarding government plans to target multi-nationals for tax avoidance.

The rationale provided by IESBA also aligns to the Organization for Economic Cooperation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action Plan which seeks to stop domestic base erosion and profit shifting by muti-nationals using tax avoidance measures. Tax avoidance measures can, for example, include exploiting gaps and mismatches in tax treatment of certain types of income between different countries.

Other major multinationals which include Google and Apple have also suffered immense reputational risk and public scrutiny due to anti-avoidance measures being adopted resulting in BEPS, regardless of their tax structures being legal in the respective countries.

Whilst tax avoidance is legal and IESBA is explicit in the final version that the new sections do not intend to deal with tax evasion as that is clearly illegal, but rather seeks to assist PA’s and clients with their ethical responsibilities when tax planning.

Impact of the new sections to the Code in South Africa

Current global practice of controlling bodies to which PAs are required to belong to have their own Code of ethics. These Codes are primarily adopted from the IESBA Code along with any revisions thereto.

The country specific Codes are used by the relevant controlling bodies to regulate their members and may result in disciplinary action where a member is found guilty of not complying with the code.

The IESBA and South African controlling bodies Codes are principle based. The overarching principle of being ethical and acting in the public interest is contained in the current versions but do not contain any specific section/s on tax planning services.

The initial proposed sections and exposure draft included “tax planning and related services.” Stakeholders in their submissions highlighted that the application of the new sections to non-advisory tax services would prove too cumbersome and impractical for PAs to apply.

In the final version all references to related services has been removed but a new subsection has been inserted for “related services” to ensure that tax compliance services, or dispute resolution services etc. to the extent that it relates to the tax planning service remain subject to the new sections.

Unpacking the new sections

Identifying what constitutes “tax planning services”

• Whilst no definition is provided for this term, the application guidance provides examples, which include:
  • Advising an individual to structure their tax affairs to achieve investment, retirement, or estate planning goals;
  • Advising an entity on structuring its international operations to minimize its overall taxes;
  • Advising on transfer pricing arrangements; and
  • Advising on the utilisation of assessed losses.
• Based on the above list it is clear that none of the above examples would generally be considered tax evasion, it is highly probable that these tax services will fall into the ambit of tax avoidance.

Setting out the responsibilities of the PAs and the Client

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• The Code clearly illustrates a separation in terms of the the duties and responsibilities of a PA in advising on a tax planning arrangement and the client (i.e., Management and those charged with Governance”) in undertaking the tax planning arrangement.
• This is welcomed as it ensures that the lines are not blurred in terms of the PA’s responsibilities the client’s responsibilities in a tax planning arrangement should a dispute arise later on between the PA and the client.

The “credible basis” test

• PAs are now required to ensure that when providing tax planning services that they have a “credible basis” for the advice rendered.
• The guidance provided by IESBA as to what would constitute a “credible basis” emphasises that professional judgement, assuming that such PA has the relevant professional competence, is required to determine if the advice rendered has a credible basis.
• Examples as to how a PA would go about determining a credible basis, these include:
• • Reviewing the relevant facts and circumstances;
  • Assessing the reasonableness of assumptions; and
  • Reviewing relevant legislation, court decisions and tax authorities’ rulings or guidance.
• It has also been recognised in the Code that a “credible basis” may differ from one country to another and must determined in the context of the relevant country’s laws and regulations.

The “stand-back” test

• This test follows the credible basis and requires that once a PA has determined a credible basis for the tax planning advice to be rendered, the PA must also apply a secondary “stand-back” test.
• This test effectively requires the PA to exercise their “professional judgment and consider the reputational, commercial and wider economic consequences that could arise from the way stakeholders might view the arrangement.”
• Upon applying the “stand-back” test if the PA makes the decision not to recommend the tax planning arrangement regardless of it having a credible basis, the PA should advise the client accordingly and explain the basis of the PA’s conclusion.

The “Gray Area”

• Tax planning can at times result in uncertainty as to whether the proposed tax planning arrangement would be compliant with the relevant tax laws and regulations.
• Examples of circumstances which may give rise to uncertainty and include:
  • Difficulty in establishing adequate facts;
  • Gaps in tax laws and regulations; and
  • Recent case law or tax rulings that cast doubt on similar tax planning arrangements.
• The Code also encourages the PA to advise and discuss the uncertainty with the client.

Threats and safeguards to independence

• The Code identifies self-review, self-interest and/or advocacy threats that may arise when providing tax planning services.
• The code also sets out the relevant safeguards that can eliminate such threats.

Communication and documentation

• Proper communication with the client is encouraged when providing tax planning services and ensuring that documentation is maintained to protect a PA should a dispute arise thereafter.

Other considerations

Practical difficulties in monitoring this section

• Differing tax advisers (PAs and/or non-PAs -e.g., legal tax practitioners) can interpret tax law differently based on the same exact set of facts.
• South Africa has seen several tax cases in the last 2 years where the taxpayer was successful at the Tax Court level however upon the matter proceeding to the Supreme Court of Appeal (SCA) the findings of the Tax Court was overturned. This type of situation should not give rise to a PA being subject to any sort of misconduct/disciplinary action as this is the very nature of the profession in question. It is highly subjective and requires an extremely high level of competence and professional judgement to render tax planning services.
• Controlling bodies may not have the relevant expertise in-house to determine, for example, if a PA has satisfied the credible basis and/or stand-back tests resulting in inconsistencies in monitoring and disciplinary PAs. In this case it is likely that the services of another tax adviser would be engaged assist in this process. This will result in additional costs being incurred by the controlling body and ultimately passed down to its members (PAs) by way of membership subscriptions.

Uneven playing field between PAs and non-PAs (i.e. legal advisers)

• Whilst the legal profession is highly regulated, the additional hurdles placed on PAs by having to meet the credible basis and stand-back test which the non-PAs are not subject to creates a significant disadvantage to PAs rendering the same service.
• In South Africa legal tax advisers already have an additional advantage by way of legal professional privilege (LPP) which non-legal tax advisers (PAs) do not have despite this being requested for several years.
• The new sections in the Code for PAs will create a further incentive for clients to seek tax planning services from non-PAs as opposed to PAs as they will have the benefit of legal professional privilege and the non-PA will not be subject to the Code applicable to PAs.
• This specific issue was raised as question with IESBA during the abovementioned webinar and the response from Professor Jens Poll was that this was not really considered problematic on the basis that the service provided whether by a PA or a non-PA is becoming more aligned and that he is of the view that there is a global trend of shifting towards regulating services as opposed to professions.

Conclusion

The new sections to the IESBA Code will be pronounced shortly with the effective date of 30 June 2025 however controlling bodies in South Africa may early adopt these provisions into their respective codes. PAs need to be aware of these additional requirements to ensure that they do not fall short and end up facing disciplinary action.