Responsive Regulation, Tax Compliance, and Tax Avoidance
By David Duff, Professor of Law, University of British Columbia
Among the many spheres of legal regulation that have been influenced by John Braithwaite’s work on responsive regulation, one of the most important but least widely appreciated is taxation. Beginning with the Australian Tax Office’s shift from a deterrence approach to a “compliance model” of tax enforcement in the 1990s, governments and revenue authorities in several developed countries have introduced legislative and administrative reforms based on the central insights of a “responsive regulatory pyramid”.
Aiming at the base of the pyramid, reforms have sought to encourage voluntary compliance through enhanced procedural fairness and the development of cooperative relationships among revenue authorities, taxpayers and tax intermediaries based on improved understanding and responsiveness by revenue authorities and increased transparency and information disclosure by taxpayers and tax intermediaries. At the same time, governments and revenue authorities have sought to enhance their capacity to “escalate up” the regulatory pyramid where necessary through mandatory disclosure rules, the assessment and management of tax risks, the introduction of stiffer penalties and other sanctions for non-compliance, and the regulation of tax intermediaries through licensing regimes and promoter penalties. They have also pursued “meta risk management” by encouraging business enterprises to focus on managing their own tax risks, and cultivated regulatory networks through the establishment of international partnerships like the OECD Forum on Tax Administration, the Joint International Tax Shelter Information Centre (JITSIC) and the Leeds Castle Group.
As an efficient strategy to marshal limited regulatory resources for maximum effectiveness, responsive regulation is, as Braithwaite himself suggests, “just common sense.” At a deeper level, however, responsive regulation also reflects a set of values associated with respect, dialogue and non-domination that, as Braithwaite also emphasizes, “define not only a just legal order, but a caring civil society.” As a result, if responsive regulation is to fulfill these broader aims, the legal framework that the regulatory pyramid supports must itself be recognized as legitimate and fair.
Although this perceived legitimacy likely exists for many areas of legal regulation (at least in democratic societies), the regulation of tax law is much more difficult since the legitimacy of specific taxes and (to a lesser extent) taxation in general remain subjects of considerable debate in most democratic societies. More seriously, perhaps, to the extent that tax laws are complicated and unclear, it is problematic for revenue authorities to rely on regulatory escalation to enforce their interpretation of the law, absent independent affirmation by the courts. Each aspect of tax law poses challenges for responsive regulation in this area of law.
Regarding the legitimacy of specific taxes or taxation in general, one might conclude that these are determined by the political process and must, like all laws, be assumed as legitimate for the purpose of enforcement. At the same time, the theory and practice of responsive regulation suggests that governments and revenue authorities should be responsive to challenges about the legitimacy of taxes, and should work to build trust with citizens about the collection of public revenues through taxes, as well as their expenditure.
The problem of legal uncertainty is a deeper one for responsive regulation, as it calls into question the legitimacy of any regulatory escalation where the revenue authority’s interpretation of an unclear rule or standard has not been recognized by the courts. This is a particular concern with abusive tax avoidance, where transactions are designed to come within the words of the tax law despite contradicting their purpose. Although most developed countries (with the rare exception of the United Kingdom) have adopted broad anti-abuse doctrines or general anti-avoidance rules to forestall these opportunities, these doctrines and rules are notoriously difficult to apply, particularly in common law jurisdictions with a history of complex tax legislation comprised of detailed rules. At the same time, anti-abuse doctrines and rules are arguably essential to maintain the integrity of the tax system and public trust in its fairness, the erosion of which can undermine voluntary compliance with tax laws, particularly in self-assessment systems like those in developed common law jurisdictions.
Although its complexity suggest that tax law is apt to be less certain than other areas of law, theories of responsive regulation suggest two approaches to enhance legal certainty strategies to enhance legal certainty, making it possible for anti-abuse rules to be applied in a more coherent and consistent way. First, as Braithwaite himself as argued, the combination of detailed statutory rules with broader statements of principle can both lessen complexity and enhance legal certainty, providing statutory guideposts to inform the application of broader anti-abuse doctrines and general anti-avoidance rules. Second, legal certainty can be enhanced through increased communication among practitioners, regulators, judges and academics – building on some of the core values of respectful dialogue hat underlie the theory of responsive regulation.
