Tax Uncertainty and Auditor-Provided Tax Services: The Impact of Regulatory Changes in the EU

Abstract

This paper examines the effects of tax uncertainty on the purchase of auditor-provided tax services (APTS). Due to the frequency of both proposed and enacted tax reforms firms face significant tax uncertainty. We predict this uncertainty leads firms to make external investments in APTS. Using a cross-European sample over the years 2009 to 2021, we predict and find a significant positive association between tax uncertainty and APTS. This link is more pronounced for large firms, profitable firms, and firms with a Big 4 auditor. Regulators continue to question the potential independence concerns related to non-audit services such as APTS and have enacted restrictions on these services. We also find regulatory restrictions on the provision of APTS curb the demand for APTS in response to tax uncertainty. Overall, these findings suggest that firms rely on the auditor's tax expertise when facing tax uncertainty. However, regulations limiting APTS attenuate this association. These results add to the growing literature on the consequences of tax uncertainty and the determinants, as well as, the costs and benefits of imposing restrictions on APTS.

Keywords: ETR volatility, tax uncertainty, APTS, tax services, tax fees

JEL Classification: H25, H26, K23, L84, M41, M42, M48