Responsive Regulation, Risk and Rules: Applying the Theory to Tax Practice

By Judith Freedman, KPMG Professor of Taxation Law, Oxford University

The work of John Braithwaite and his colleagues on responsive regulation has had a major influence on tax authorities around the world. Many tax officials are familiar with the regulatory pyramid and compliance model developed by his team. Via the Australian Tax Office and the OECD Study into the Role of Tax Intermediaries, these ideas have spread widely and have been closely linked to the development of risk-based regulation by revenue authorities.  These authorities, under budgetary pressure, see that efficient resource allocation can be facilitated by use of the responsive regulatory pyramid; risk-rating taxpayers can ensure that enforcement is targeted towards those at the top of the pyramid.  The revenue authorities offer enhanced co-operation which seeks to influence the behaviour of corporate taxpayers by building a relationship  based on co-operation and trust, with both parties going beyond their statutory obligations. These outcomes have been welcomed by the corporations and professional tax community in a number of countries and show a practical application for responsive regulation.

This application of responsive regulation theory is not without difficulty in the corporate  tax sphere, however. As Braithwaite has noted himself, compliance with the law is not generally the problem in this area; rather, the issue is that that the compliance may not reflect what the revenue authorities perceive to be the policy purposes of the tax laws. Influencing corporate taxpayers away from creative compliance by the use of risk-rating and the withdrawal of enhanced co-operation involves an exercise of discretion which is not fully accountable and open to scrutiny. Whilst recognizing that it is the essence of responsive regulation that it goes beyond rule compliance, the paper argues that seeking to penalize taxpayers who do not accept the interpretation of the revenue authority of complex tax law by forcing them up the pyramid may go too far. It may also undermine the very trust it is sought to create.

Tax law is a difficult area in which to apply responsive regulation, precisely because of the complexity and artificiality of taxation. Whilst paying tax is essential to the well-being of society, the level of the tax to be paid is a matter for proper political debate and the policy objectives of a particular piece of legislation can be hard to discern. Finding a framework which balances the positive aspects of a responsive regulatory regime and risk-rating with  the need to provide controls on the discretion of revenue authorities is now the challenge to be met.