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Proposal

Foreign Exchange Tribute

Innovative Financing to Fund the

Sustainable Development Goals

Prof. Dr. iur. Gerhard Vorwold

MD close the gap – worldwide

Berlinickestr. 2

12165 Berlin

Germany

Phone: 0049 – 160 – 1616001

[email protected]

https://closethegapworldwide.wordpress.com

close the gap - worldwide 1

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TABLE

OF CONTENTS

Page

Abstract 5

Preface 7

A. Financing the Sustainable Development Goals (SDG) 7

1. The Agenda 2030 7

2. Costs 8

3. Urgent need for cross-national funding 8

4. The financial sector as counterpart 9

B. The Air Ticket Solidarity Levy and UNITAID 11

1. About UNITAID 11

2. The air ticket solidarity levy 12

3. Perspective from the air ticket solidarity levy and UNITAID 13

C. New Innovative Finance Models 14

I. Criteria for a success-promising finance model 14

II. Potential finance models 15

1. Financial Activities Tax (FAT) 15

2. Financial Transaction Tax (FTT) 15

3. Value Added Tax (VAT) on financial services 16

4. Foreign Exchange Tax (FX-Tax) 16


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D. Implementing a Foreign Exchange Tax/Tribute 17

I. Basic model: The Foreign Exchange (FX-) Tax 17

1. Potential objectives 17

2. Currency transactions - what is it about? 17

3. Extent of the tax 18

4. What we can learn from history 18

5. About the development of the foreign exchange markets 19

6. Who are the “makers”? 20

7. The “settlement/Herstatt risk” 21

8. The CLS Bank 21

9. Tax rate 22

10. Most important: the expectable revenues! 23

11. Who bears the tax? 24

12. Location of the recognition 25

13. Technical feasibility 25

14. Are switchover facilities expectable? 26

15. Is there a market impact on volume? 27

16. Avoiding double and non taxation 27

17. Conformity with international law 27

18. The “fair spread” requirement 28

19. Stability and sustainability? 28

20. The motivation factor / acceptability by the givers? 28

II. Upgrading the F(X)-Tax: Conversion into a (FX)-Tribute 28

1. The Foreign Exchange Tribute 28

2. Steps of making the Foreign Exchange Tribute work 29


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III. Forming the Funding Facility 30

1. Task of the Funding Facility 30

2. Use of the financial means 30

3. Structure of the Funding Facility 30

Abbreviations 32

References 33


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The Foreign Exchange Tribute

Abstract

I. This proposal introduces a “Foreign Exchange Tribute” to minimize the funding gap for accomplishing the sustainable development goals (SDGs) of the UN “Agenda 2030”.

II. The finance sector is seen as the primary beneficiary of the growth of the global economy. Thus it is uniquely placed as a channel to redistribute some of the profits and wealth of globalization towards the funding of the SDGs.

III. A tribute on the foreign exchange market, which had in 2016 a 5.1 trillion USD turnover per day, is seen as the most promising model to achieve this goal.

IV. To guarantee that the revenues are spent for the intended goals, the contribution is formed as a tribute instead of a tax. This means that the proceeds are seen as an exchange for using the global public goods and at the same time are earmarked directly to an international Funding Facility (FF).

V. The Funding Facility has three groups of members with equal voting rights: The givers, the governments of the participating countries and relevant civil society networks.

VI. The FX-tribute generates substantial and stable flows to the fund, causes the least distortion of the real economy, addresses the legal and technical challenges feasibly, and makes avoidance difficult, risky and unprofitable. At the same time it empowers growth of the economy.

VII. The FX-tribute has the following attributes:

1. The base of the tribute is the sum of every single settled currency exchange.

2. The tribute rate is 0,01 % on each settled currency exchange.

3. The tribute is centrally collected by the CLS Bank in London, Real Time Gross Settlements (RTGS) or similar infrastructure (e.g. EU’s “Target”).

4. Debtors of the tribute are the Central Banks of the participating countries.


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5. Bearers of the tribute are the customers of the currency transactions.

6. The tribute is executed by an additional line on the settlement paper.

7. The FX-tribute can be adopted and introduced unilaterally by any country or currency zone that wishes to do so. A cooperated implementation by some more of the leading currencies is desirable.

8. The estimated revenues, if implemented by the most actively traded currencies, will be in the range of more than 100 billion US dollar per year.


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Close the Funding Gap


Innovative Financing to Fund the

Sustainable Development Goals

Preface

This proposal aims to implement - in cooperation with the financial market - a centrally collected Foreign Exchange (FX-) tribute for the most actively traded currencies. It is part of a process towards the realization of international mechanisms to address the vast shortfall in finance required to meet global developmental and environmental challenges and commitments.

A. Financing Sustainable Development Goals (SDGs)

1. The Agenda 2030

In September 2015 at an historic UN summit world leaders adopted the “2030 Agenda for Sustainable Development”, implementing 17 Sustainable Development Goals (SDGs). 1 The Agenda was built on the Millennium Development Goals (MDGs)2 enacted in 2000, and aimed to go further to end all forms of poverty.

The 2030 goals are unique in that they call for action by all countries, poor, rich and middle-income to promote prosperity while protecting the planet. They recognize that ending poverty must go hand-in-hand with strategies that build economic growth and

1 UN (2015).2 UN (2000).


http://www.un.org/millenniumgoals/

http://www.un.org/millenniumgoals/

http://www.un.org/sustainabledevelopment/sustainable-development-goals/

http://www.un.org/sustainabledevelopment/sustainable-development-goals/

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address a range of social needs including education, health, social protection, and job opportunities, while tackling climate change and environmental protection.3

2. Costs

The resource gap combining the funds needed to meet the 2000 Millennium Development Goals (MDGs) by 2015, the Official Development Assistance (ODA) target of 0,7 percent of GNI (gross national income), and environmental crises targets was in the range of $US 324 – 336 billion per year between 2012 and 2017, $US 156 billion for the climate change4 and $US 168 – 180 billion for the Official Development Assistance.5

The World Bank 2009 estimate of the cost of climate change adaption for developing countries was $US 75-100 bn.6

In 2014, the United Nations indicated that several trillion US dollars a year would be needed to achieve the sustainable development goals.7

3. Urgent need for a cross-national funding

Though the national resourcing for global challenges has grown during the last decades, it is not enough to solve the pressing problems. If the world doesn’t want to enter a spiral of crises we must look today for means to solve at least the most urgent challenges cross-national or even global.

The growth of the world economy did not keep pace with the allocation of effective means for the funding of these global challenges. If the world community doesn`t work together to finance the necessary and required measures, we mortals will be confronted with the collective risk of a worldwide economic, financial, social and ecological disaster, which destroys the foundations of the globalization. Central for the solution of this dilemma is to close the funding gap for the SDGs in a sustainable way.

The global economy can’t fulfill its purposes without a solid foundation of social and ecological stability. The failure of a stable long-term financing to support this will induce, that long-term goals will continuously not met and the ecological changes will escalate dramatically. This is not a recipe for sustainable global stability; instead we

3 https://www.un.org/sustainabledevelopment/development-agenda/4 Committee (2010), Endnote 2.5 See Committee (2010), p. 11.6 UN (2009).7UNCTAD (2014).


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will get a rising dimension of social riot and disturbance, driven by poverty, inequality and a rapidly worsening environment.

Thus, the search for and the finding of new sources of innovative finance to close the funding gap for the SDGs seems inevitable.

In this context innovative financing may play a critical role: funding along with domestic financial flows, foreign direct investments and Official Development Assistance (ODA).8 For many experts it is increasingly clear that innovative financing might be the major catalyst of funding the global development goals.

Looking closer at innovative finance, one category consists of mechanisms viewed as innovative because of their capacity for mobilizing additional resources to support development policies. The mechanisms are aimed at correcting the negative effects of globalization, by introducing a direct relationship between the funders and the use of the collected money.9

Discussing the use of the funding impact investment is one particular promising trend. It takes into account not only the viability of a project, but also its social and environmental impact.

Actually the main players promoting innovative financing mechanisms are the members of the “Leading Group on Innovative Financing for Development”. They could be seen as the forefront of the growing movement driven by the urgency of fighting poverty, hunger and disease. The group inaugurated the air ticket solidarity levy (see discussion in the following chapter B) and also proposes a solidarity tax on currency transactions.10

4. The financial sector as counterpart

Following the liberalization of the capital market the financial sector got decisive for the development of the world economy. The international world of finance, consisting of savings and investment banks, merchants and intermediates, institutional investors, portfolio managers and hedge funds became inextricably connected with globalization. It got the elixir of the global economy. Global economic activity and the global finance sector developed concurrently and are profoundly interdependent. Without the financial sector the globalization would not be what it is and vice versa.Additional some aspects of the financial system, especially the foreign exchange markets, are intrinsic international.8 The Leading Group, Remarks by M. Jashi, 2018 ECOSOC Forum FfD, 25 April 2018http://www. Leadinggroup.org/article1255.html9 The Leading Group, FAQs – Innovative financing, 16 January 2012http://www.leadinggroup.org/rubrique325.html10 Committee (2010).


http://www.leading/

http://www/

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The architecture of the financial sector is strongly interwoven with the globalized economy and the financial line of business appears as the preferential profiteer of the global economic growth. Based on the internationally accepted “ability to pay”11 and the “beneficiary pays” principles the reasoning is logically consistent, that the main beneficiary of the globalization - the financial sector - should contribute to guarantee the allocation of needed means for the worldwide challenges, which, if they are not tackled, could - as already pointed out - threaten the functioning of the transnational economy.

Those, who especially benefit from global economic activities have a responsibility to contribute to the social and ecological stability on a global level. Therefore, it seems to be justified to demand that the financial sector and its actors give back some of the wealth and profits, they derived from globalization, for the protection, the development and the upgrading of the global public goods.12

The financial sector represents the best mechanism to reach these goals. Above all the clients of the financial market in the industrial and in the developing countries are rarely members of the poorer part of the population. Therefore, the financial sector seems the most appropriate and unique source, to contribute a fraction of the wealth, derived from globalization, for the funding of the global public goods.13

Within the financial sector the foreign exchange market is the most internationally organized and integrated segment, and thus it might be the most appropriate sector of the “finance family” to take the lead and the responsibility for this task. The currency market may also offer the best mechanism within the financial sector for achieving the goal of co-financing the sustainable development goals – as will be explained in the following chapters.14

11 See critical Vorwold, Gerhard A, 2013, 1. Teil, B III 2.3 “faculty-, ability to pay” principles.12The World Bank defines global public goods as “both nonrival and nonexcludable goods, which cover issues that prove transborder in nature, including (1) the environment, (2) the prevention of communicable diseases, (3) international trade, (4) international financial architecture, and (5) global knowledge for development.” elibrary.worldbank.org/doi/abs/10.1596/978-1-4648-0484-7_global_public…The European Commission explains the objective of the global public goods as follows: “Their overall objective is to support inclusive sustainable development: environment and climate change, sustainable energy, human development, food and nutrition security and sustainable agriculture, migration and asylum.” https://ec.europa.eu/europeaid/commision-implementing-decision-adopting-multiannual-indicative-programme-thematic-programme-global_en; vgl. auch Vorwold 2013, p. 75.13 See also Vatican 2018, “Oeconomicae Et Pecuniariae Quaestiones“, especially No. 3114 See also Committee (2010), p. 26.


https://ec.europa.eu/europeaid/commision-implementing-decision-adopting-multiannual-indicative-programme-thematic-programme-global_en

https://ec.europa.eu/europeaid/commision-implementing-decision-adopting-multiannual-indicative-programme-thematic-programme-global_en

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B.The Air Ticket Solidarity Levy and UNITAID15

It was widely perceived and is confirmed by current political trends that online organizations and developing countries can no longer depend on the generosity of donor States for their funding. It is here that air ticket solidarity levy and UNITAID, borne from talks between former President Jacques Chirac of France and Luiz Inácio Lula da Silva of Brazil, stepped in with funding the air ticket solidarity tax/levy and UNITAID.

1. About UNITAID

The aim

UNITAID, hosted by the World Health Organization (WHO) in Geneva is a drug purchasing facility whose activities are similar to that of a central buying organization. It negotiates global price reductions on pharmaceutical drugs, such as tuberculosis, malaria and HIV, which all public health organizations are able to profit from.

The financing

Half of UNITAID’s budget comes from institutional sources, multi-year government contributions and the Bill and Melinda Gates Foundation, the other half comes from an international tax/levy placed on airline tickets.

The organization of UNITAID16

Executive Board

UNITAID’s decision making body is the Executive Board, which consists of 12 members:

1 representative nominated from each of the founding countries Brazil, Chile, France, Norway, UK, Spain and the Republic of Korea (= 7 Rep.);

2 representatives of relevant civil society networks (nongovernmental organizations and communities);

1 representative of African countries designated by the African Union; 1 representative of the constituency of foundations 1 representative of the World Health Organization

The President of the executive board was for a long time Philippe Douste-Blazy, former minister of foreign affairs in France. Now, it is chaired by Marta Maurás, 15 See Scott Belinksi, http://archive.economonitor.com/blog/author/sbelinksi/16 https://unitaid.org/about-us/


http://archive.economonitor.com/blog/author/sbelinksi/

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Ambassador and former Permanent Representative of Chile to the United Nations in Geneva.

Executive Committees

In 2008, UNITAID’s Executive Board formed two committees to guide them in their work:

The Finance & Accountability Committee, Chair Gates Foundation; Vice-Chair NGOs

The Policy & Strategy Committee, Chair France; Vice-Chair Brazil

Secretariat

The secretariat manages the day-to-day operations and is led by an Executive director (currently Lelio Marmora). It is responsible for finding new ways to prevent, diagnose and treat HIV/AIDS, tuberculosis and malaria more quickly, effectively and affordably. It is hosted by the World Health Organization (WHO) and based in Geneva, Switzerland

The performance

UNITAID started up in 2006 and currently raises more than $US 300 million per year.17 From 2006 through 2011 UNITAID committed more than $US 500 million to 80 recipient, primarily low-income countries. In partnership with the Clinton Foundation, UNITAID has obtained a reduction in the price of second-line AIDS treatments, ranging from 25% to 50%, depending on the country’s income level, and a 40% reduction in the price of pediatric treatments.18

2. The air ticket solidarity levy19

The air ticket solidarity levy (also known as “Chirac Tax”) is a surcharge on the civil aviation tax. It is charged to passengers taking off from airports in countries implementing the scheme.

France was the first country to implement the tax in 2006, followed by 10 other States.

17 The Leading Group, FAQs – Innovative financinghttp://www.leadinggroup.org/rubrique325.html18 The Leading Group, FAQs – Innovative financinghttp://www.leadinggroup.org/rubrique325.html19 See also Committee (2010), p. 12.


http://www.leading/

http://www.leading/

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The mechanism is based on territoriality, not nationality. All airline companies, whatever their nationality, have to levy the contribution if departing from an airport located in a participating country. To each economy class ticket purchased in these countries, a generally $US 1 tax is added, or a $US 40 tax on each first or business class ticket.

Airline companies are responsible for collecting the contribution which is added to the fees and charges already part of the plane ticket final price. Thus collecting costs are minimal.

European regulations and WTO agreements allow for such a flat contribution given that it is non-discriminatory.

According to a 2011 report by France’s National Assembly, the tax displayed “no negative effect on air traffic or jobs in the airline sector”.20 The contribution is set with such a low rate that the cost of evasion would be much higher than paying the contribution.

The solidarity levy generated since its inception in 2006 until 2012 over one billion Euros.21

3. Perspective from the air ticket solidarity levy and UNITAID

UNITAID’s Ex-President Philippe Douste-Blazy, former minister of foreign affairs in France, wanted to make the financial transactions tax (FTT) that European countries were flirting with for years into a permanent source of funding international development. “Where UNITAID’s airline tax has succeeded in securing funding for health programs across the developing world, an international tax on financial transactions could secure funding for other development sectors, such as education or sanitation.”22

According to Douste-Blazy, a financial transactions tax could generate over $30 billion a year and “should have no significant negative impact on national financial markets.” Additional he claims, that “European leaders must learn from UNITAID’s successes and insist that over 50 percent of the proceeds of an FTT are allocated to poverty eradication.”23 The possibility to use the experiences with the air ticket solidarity levy and UNITAID for introducing a financial transaction tax (FTT) or a similar perhaps even more success-promising model will be discussed in the following chapters.

20 http://www.assemblee-nationale.fr/13/rap-info/i3645.asp21 http://www.avionews.com/index.php?corpo=see_news_home.phpnews_id=1149181 &pagina_chiamante=index.php22 http://www.huffingtonpost.com/philippe-dousteblazy/financialtransaction-tax_b_2440893.html23 http://www.huffingtonpost.com/philippe-dousteblazy/financialtransaction-tax_b_2440893.html


http://www.huffingtonpost.com/philippe-dousteblazy/financialtransaction-tax_b_2440893.html

http://www.huffingtonpost.com/philippe-dousteblazy/financialtransaction-tax_b_2440893.html

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C. Innovative Finance Models

I. Criteria for a success-promising finance model

The following criteria are seen as decisive and crucial for the analysis, whether a funding model is viable. They got analyzed and used in different grades and details by renowned and well-respected economists, other scientists and organizations like the “Leading Group on Innovative Financing for Development”. They are also base for the decisions in this proposal.24

Significance / sufficiency

Question: How much money would it raise? Are the potential revenues sufficient to be seen as a significant contribution?

Impact on the market / painless contribution

Question: Can the market distortions and avoidance mechanisms kept within acceptable constraints? Is the levy a painless contribution? Does it follow economic principles? How big is the effect on revenue and profitability, jobs, industry in general?

Feasibility

Question: Is it cost-effective? Are there negative side effects? Can the legislative and technical challenges be solved within a justifiable frame? Is it a transparent levy, easy to implement? Is a new, administrative machinery needed?

Sustainability and fitting accuracy

Question: Will the revenues be relatively steady over the time and is the source adequate qualified for the role of funding the global public goods?

Fair spread

Question: Is the burden equally spread around the world preferable to those who are profiting from globalization?

The motivation factor / acceptability

24 Committee (2010), p. 12 -14.


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Question: Can the model connect the payers emotionally with the funding? May it boost the willingness, cooperativeness, readiness and empathy of the givers?

II. Potential finance models

1. Tax on financial profits and remunerations (Financial Activities Tax, FAT)

A Financial Activities Tax (FAT) would be imposed on the earnings of the financial sector. However the obvious disadvantage of such a tax is that its administration would be very complex. Seen in the context with the traditional income tax the FAT would probably be difficult to introduce. The necessity of elaborating a commonly accepted tax base, tax rate and the problems of collecting the tax makes it time consuming and not very compatible with the urgent need of financing the global challenges.25 Also the impact on the market would be unclear and difficult to predict. The legislative and technical challenges are immense and can hardly be solved in an acceptable and justifiable frame.

2. Financial Transaction Tax (FTT)

A comprehensive Financial Transaction Tax (FTT)26 would cover almost all financial operations.27 This tax has the clear advantage of being widespread, which would result in high revenues (according to the members of the European Parliament it could raise solely for the EU € 200 billion per year28).

However, the FTT has both conceptual and practical difficulties in defining the taxable persons, taxable base and organizing the collection. It would be difficult to cope with the possibilities of tax avoidance and tax evasion in an environment, where the ingenuity of the financial industry may complicate enforcement (cross-border collection and audits, mutual assistance).29 Even though these problems could be approached with time, the technical and legislative success of such a widespread avoidance and evasion system would be unsure. Finally, the FTT, already being set up in some countries, could lead to double taxation.

25 See also Committee (2010), p. 15 -16 under 3.1, “A financial sector activity tax on (excess) profits and remuneration”.26 Monti-Commission (2016), Report of the Monti-Commission, which scrutinizes a financial transaction tax as source of revenues for the EU and their consequences for the stability of the financial markets.27 See also Committee (2010), p. 17-19 under 3.3, „A broad financial transaction tax”.28 See MEPs call for the introduction of a tax on financial transactions”, European Parliament Press release following their plenary session of 8 March 2011, http://www.europarl.europa.eu/en/pressroom/content/20110308IPR15028/html/MEPs-call-for-the-introduction-of-a-tax-on-financial-transactions29 See Leading Group (2011), under “background”.


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Thus the FTT is, even though it might be adequate for special jurisdictions for specified fiscal and regulatory purposes, less suitable for the task of financing the sustainable development goals.30The introduction is a least not recommendable as long as there is a more success-promising model of financing eligible (see under Chapter D).

3. Value Added Tax (VAT) on financial services

A Value Added Tax (VAT) on financial services meanwhile seems to be technically feasible. However considering the different opinions about the notation and the aim of financial services (e.g. the return on capital component), a VAT would require a political selection procedure. Due to this the VAT would have similar problems to solve as a broad financial transaction tax (FTT).31

4. Tax/levy on foreign exchange (F(X)-Tax/Levy)

An intermediate result of the first three funding models could be that they all have advantages for domestic funding, but not as much for the task of financing global public goods. They draw more upon financial activity at the national level and with that are both subject to the “asymmetric revenue collection” and the “domestic revenue” problem. Feasibility and impact on the market have to be questioned. Also, there is hardly a special motivation factor. Whether a tax/levy solely on currency transactions, a so called foreign exchange tax or levy (F(X)-tax/levy would cope with these problems, will be discussed in the following Chapter D.

D. Implementing a Foreign Exchange Tax/Tribute

30 See Committee (2010), p. 17.31 See Committee (2010), p. 16-17 „A VAT on financial services”.


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I. Basic model: The Foreign Exchange Tax [F(X)-Tax]

The foreign exchange tax [F(X)-Tax]32 is a percentage on individual foreign exchange transactions, assessed by the dealers in the foreign exchange market and collected by existing financial settlement systems. A hallmark of a F(X)-Tax is an extreme low tax rate, which avoids distortions, but due to the huge amount of daily sales in the foreign exchange market would lead to significant revenues.

1. Potential objectives of a foreign exchange tax

The possible objectives of a foreign exchange tax can be subscribed as follows: Defense of speculation Stabilization of foreign exchange rates Indirect, preventive burden on capital gains Realization of revenues

Here the realization factor is in the foreground.

2. Currency transactions – what is it about?

Foreign exchange markets deal with currencies. Per offer and demand exchange rates determine the relation of currencies against each other. Currency dealers display bid (buy) and ask (sell) exchange rates. There are two transfers at the same time each in an opposite direction. One currency is changed against another one - or the other way round. Thus the payment and / or settlement systems of at least two countries / two currencies (e.g. the Euro) are involved. If Euros are exchanged with Yen or a US dollar with Euros, the tax burden arises on both sides of the deal.

3. What we can learn from history

In 1972 the economic Nobel laureate James Tobin33 proposed a foreign exchange tax against the background of the end of the Bretton-Woods-System. Following this the tax is often also called “Tobin Tax”.

NoteIn Bretton Woods the finance ministers and the central bank chefs of 44 countries of the Anti-Hitler-Nations established in 1944 the US-Dollar as global lead currency.

32 See Vorwold (2013), pp. 249-265.33 Tobin J, Proposal within the 1972 Janesway Lecture at Princeton University; published in 1974 under “The New Economics One Decade Older, pp. 88-92; see also Tobin (1978).


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This decision was made against the will of the British envoy John Maynard Keynes, who already at that time proposed a World Central Bank. The Bretton-Woods-System was earmarked by fixed exchange rates and the obligation of the USA, to hedge their currency by gold reserves.However the exploding costs of the Vietnam War in the 1960s and 1970s caused the USA to give up the gold standard in 1971 to raise the additionally needed money. -With this inflation started to accelerate and the era of “deregulation” began.

Tobin proposed a taxation of currency transactions with the objective, “to throw some sand on the fire of (currency) speculation”.34 Additionally Tobin wanted to stabilize the exchange rates. In doing so he referred to Maynard Keynes, who already in the 1920th proposed a tax on currency transactions with the following words: “When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill done. (...) It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true for Stock Exchanges. (...) The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to migrate the predominance of speculation (...).”35

At the beginning of the 1990s the idea of taxing currency transactions was looped up by members of the United Nations Development Program (UNDP). However, for them in the foreground was not the stabilization of the currency markets and the curbing of speculation, but the realization of revenues for financing the development and the protection of the environment on a supra- and international level.36

Also on the country level there were some developments in the field of a foreign exchange tax, namely in Canada, Belgian, and France.

Many organizations like the European Union, labor unions, churches, the US-American “Tobin Tax Initiative”, the non-governmental organization ATTAC and prominent individuals like the hedge fund manager George Soros and the Nobel Prize winner Armartya Sen and Josef Stiglitz joined in and still advocate a foreign exchange tax.

4. About the development of the foreign exchange markets

The classical task of financial markets is to support the real economy – trade and real investment to provide the liquid funds for investments (finance function) and to facilitate cross border transactions (exchange of currencies).

34 Tobin (1978), p. 154.35 Keynes (1936): “The General Theory of Employment, Interest and Money”, pp. 159 -160.36 See Weed (2001), p. 4.


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These functions however decreased in importance during the last decades. Since the 1980s the currency exchange markets developed more and more to financial markets to enable speculation profits by exchange rate up- and downturns without a real economic background. In the foreground moved the buying and selling from finance-titles with the short-term goal, to realize exchange profits. Alongside with the ongoing liberalization and deregulation of the international financial markets, these speculation volumes grew immense. Compared to the (traditional) economic performance, the speed of these transactions grew permanently, at the same time the traded investment titles got increasingly more complicated.

In the day-trader market the length of time between back and forth of currency transactions is only a few hours and the dealers use marginal price fluctuations, which can bring in nonetheless nine-figure profits, if big sums of money are invested.

The price fixing happens up to 20 times per minute, which means that the exchange rate can change some thousand times a day.37 Single transactions about 200 to 500 million USD are not unusual.

Already in 1998 the Federation of German Investment Banks stated, that only 3% of the international capital flows served for the exchange of goods. The rest were pour finance transfers, capital looking for short term or long term investments.38

E.G. already in 2004 the worldwide exchange of goods and services and all cross border direct investments were only 2.6% of the currency transactions. The output of the currency market was 470 trillion USD, the world trade was 11.4 trillion USD and the foreign direct investments were 711 billion USD. Thus 458 trillion USD were invested for speculation. This means that 10 days of currency trade would have been enough to process the real business market.39

5. Who are the “makers”?

Currency trade occurs most frequently between financial institutions with the big banks and their dealers in the center of the market. They are followed by other institutions of the financial industry like pension funds, hedge funds, insurances and firms of the real economy, which can’t deal directly with each other, but are dependent on the big banks and their dealers to execute their trades.

37 See also Spahn (2002), p. 29.38 Cited at Staritz (2003), p. 28.39 See Staritz (2003), p. 27


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Despite its size, the market is concentrated on a few big banks. In 2007 the Deutsche Bank was the biggest player with a market share of 19.3%, followed by UBS with 14.8%, then Citi, RBS, Barclay Capital and HSBC.40

In 2018 the market share was (2017 ranking number in parenthesis) 1 (2) HSBC 12.48%, 2 (5) JPMorgan 9.69%, 3 (6) Societé Generale 9.20%, 4 (1) Citi 8.09%, 5 (3) Bank of America Merrill Lynch 6.47%, 6 (11) Barclays 6.44%, 7 (7) Deutsche Bank 5.56%, 8 (8) Credit Agricole 5.11%, 9 (12) BNP Paribas 5.04%, 10 (4) Standard Chartered 5.03%.41

The fact, that there is only a small group of actors, that run and govern the market, may facilitate the implementation of a F(X)-Tax.

6. The “settlement/Herstatt risk”

Settlement risk is the risk that a counterparty fails to deliver cash as per agreement when the currency transaction was traded after the other counterparty has already delivered the cash as per the trade agreement.

One form of settlement risk is the foreign exchange risk, sometimes also called “Herstatt risk” after the German bank that made a famous example of the risk:

On 26 June 1974, the bank's license was withdrawn by German regulators at the end of the banking day (4:30pm local time) because of a lack of income and capital to cover liabilities that were due. But some banks had undertaken foreign exchange transactions with Herstatt and had already paid Deutsche Mark to the bank during the day, believing they would receive US dollars later the same day in the US from Herstatt’s US nostro. But after 3:30 pm in Germany and 10:30 am in New York, Herstatt stopped all dollar payments to counterparties, leaving the counterparties unable to collect their payment.42

Realizing the problem with currency transactions which include 2 time zones, some international banks developed a worldwide real-time gross settlement (RTGS). Shortly after introducing this, a consortium of 69 worldwide operating financial institutions which were significant players in the F(X) market founded the Continuous Links Settlement Bank (CLS Bank) in London.43 The objective of this bank is the elimination of the settlement risk for bilateral and multilateral accounting of the currency trade.

40See Euromoney (2007): hf(x) taxp://www.euromoney.com; see also the report „Triennial Central Bank Survey, Foreign exchange and derivatives market activity in 2007“, Bank for International Settlements (BIS 2007).41 https://www.euromoney.com/article/b18bzlzzmbgq7k/fx-survey-2018-market-share-by-institution-type42http://wikipedia.org/wiki/Settlement_risk.43 www.cls-group.com


https://en.wikipedia.org/wiki/Nostro

https://en.wikipedia.org/wiki/Deutsche_Mark

https://en.wikipedia.org/wiki/Herstatt_Bank

https://en.wikipedia.org/wiki/Trade

https://en.wikipedia.org/wiki/Counterparty

https://en.wikipedia.org/wiki/Counterparty

https://en.wikipedia.org/wiki/Risk

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With the creation and usage of the CLS Bank, which settles currency transaction on a payment-versus-payment (PvP) base (you get paid only if you pay), where both legs of a currency transaction are simultaneous implemented, the settlement risk in currency markets got mostly eliminated. All transactions from all time-zones are regulated in one window.44

7. The CLS Bank

Organization

CLS today has 67 settlement members, which represent the world’s most important financial institutions45 and more than 24.000 third party clients.46

Currently, 18 of the most actively traded currencies globally are traded.47 These are: From Africa: South African rand From America: Canadian dollar, Mexican peso, US dollar From Asia: Hong Kong dollar, Israeli shekel, Japanese yen, Korean won,

Singapore dollar From Australia: Australian dollar, New Zealand dollar From Europe: Danish krone, Euro, Hungarian forint, Norwegian krone,

Swedish krona, Swiss franc, UK pound

The 24 members of CLS Oversight committee are the 18 central banks of the above listed currencies plus the Bank of England, Bank of France, Bank of Italy, Deutsche Bundesbank, National Bank of Belgium and the Netherlands Bank.

Turnover and growth

The CLS Bank started working September 2002. Meanwhile it operates the world’s largest multicurrency cash settlement system to mitigate settlement risk for the F(X) transactions of its members and their customers.48

In 2016 the daily average settled value at CLS was 4.8 trillion USD. In 2017, this value rose to 5.2 trillion USD (peak value 12.0 trillion), the daily average billable volume/number of sides was 779.000 (peak volume 2.171.000).49 This was an increase of more than 9 percent in one year.

44 See also the remarks in Committee (2010), p. 40, Fn. 31.45 CLS (2017); p. 446 CLS (2017), p. 4.47 CLS (2017), p. 6.48 CLS Group Holdings AG, Annual Report & Consolidated Accounts 31 December 2017, p. 3249 CLS (2017), p. 8


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8. Tax Rate

To define the appropriate tax rate for a F(X)-Tax it is important to know the profit margins for currency exchange deals, which typically are 3 to 5 basis points, whereas one basis point is 0.01% (one ten-thousandth) of the transaction sum. As market compatible tax rate this proposal advocates one basis point = 0,01% or one tenthousandth of the transaction sum.50 This tax rate is seen as so low as to avoid a market impact.

NoteIt has to be seen that the 0.01% or one basis point applies to each leg of the currency trade (i.e. the currency bought and the currency sold), so that the combined rate on a total single currency transaction is one basis point.

Example:

USD 10 million are sold against Swiss franc for CHF 9.0 million =

10.000.000 USD x 1 base point (= 0,01%) = 1.000 USD tax for the US government 9.000.000 CHF x 1 base point = 900 CHF for the Swiss government

9. Revenue expectations

Note 1It is assumed that there are no exemption rules concerning the foreign exchange tax. The high transparence resulting from the disclaim of any separate treatment is important for the feasibility of the F(X)-Tax, because else there would be a pressure to get preferences. This would be generally contra productive, inefficient and unjust, because loopholes would arise and corruption would get possible.

Note 2

The Bank for International Settlements (BIS) survey for 2016 stated, that trading in foreign exchange markets averaged US$ 5.1 trillion per day in April 2016.51

Note 3For this calculation a potential fall in transaction values after implementing the F(X)-Tax and an increase of the traded volume since 2016 are not validated.52

50 Schmidt (2008)51 BIS (2016), Bank for International Settlements, “Triennial Central Bank Survey of foreign exchange and OTC derivatives markets in 2016”.52 See discussion in this chapter under 15.


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Calculation of the revenues

Ascertainment of the BIS figures, if all turnovers would be taxed:

US$ 5,1 trillion (5.100.000.000.000)

x 0,01%

= US$ 510.000.000 (US$ 510 million) revenues per day,

assuming 240 business days a year53

x 240

= US$ 123.400.000.000 (US$ 123,4 billion) revenues per year

10.Who bears the tax?

The tax is levied on each individual currency transaction. Debtors of the tax are the institutions, which carry out the transactions, thus the accredited currency dealers/banks.

Bearer of the tax burden are the clients (institutions and individuals), who place the order.

11.Location of the recognition

The use of the CLS Bank in London is inextricably connected to national RTGS systems. All States limit the tax to the transactions of their currency. The currencies are held and ultimately settled within their own jurisdiction, e.g. dollar holdings though perhaps traded in different parts of the world are held in US banks.

The exchanged currencies reflect a national jurisdiction and the tax would be raised by these national revenue authorities, relying on the Central Bank RTGS system. For the Euro, an Euro-zone agreement between national tax authorities and the Euro-system, governed by the European Central Bank (ECB) would have to be reached.

All foreign exchange settlement systems (gross or netting, formal or informal, multilateral or bilateral, on- or off-shore) require an account with the Central Bank

53 Schmidt (2008), p. 10.


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that issues the currency in which the individual (‘gross’) transaction is denominated (e.g. the yen at the Bank of Japan, the USD at the Federal Reserve Board). This creates a nexus to the particular State and establishes the national taxing right for the F(X)-Tax.

Thus all settlement places have to levy the tax independent from the State territory and the nationality and - finally – they all are overseen by the Central Banks.

12.Technical feasibility

The CLS Bank already charges a small fee of 22 cents per US$ 1 million traded (= 0,000022%). A F(X)-Tax of 0,01% could piggy-back on this infrastructure, just implementing an extra line on the settlement document. The same would be feasible with the RTGS systems.

13.Are switchover facilities expectable?

It has to be seen that the currency market concentration on few financial centers like London, Singapore, New York, the complexity of currency dealings and the connectivity of the market segments almost preclude that trade desks drift away to other places.54

Also: avoiding of the tax by changing to other instruments like treasury obligations etc. or via futures or derivates doesn’t seem very worrisome, because these are generally hedged by cash deals and with that indirect object of the tax.55

Additionally it has to be seen that the benefit of substation of financial products or transactions to avoid the tax would be very small and the cost very large (i.e. excluding yourself from one of the most liquid, centrally settled markets).56

Finally it has to be considered that financial regulators and Central Banks unanimously encourage the use of the existing RTGS and CLS Bank models to minimize the “Herstatt risk”.57

Conclusion: The legal monopolies exclusively held and issued by the Central Banks of the currencies offer a unique opportunity to frustrate or even eliminate geographical tax avoidance in an efficient way.58 Thus scholars and officials increasingly recognize that avoiding the F(X)-Tax is difficult, risky and unprofitable.59

54 Spahn (2002), p. iii.55 See discussion in this proposal under D I 3 “Extent of the tax”.56 Committee (2010), p. 2957 See discussion in this proposal under D I 7 “The settlement/Herstatt risk“.58 Committee (2010), p. 559 Schmidt (2008), p. 5


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14. Is there a market impact on volume?

Three studies from the first decade of 2000 take account of the impact of a F(X)-Tax on trading volume. Nissanke (2004) estimates elasticity across the market at – 0.12 and Spratt (2006) at – 0.11. Schmidt (2008) found that the elasticity of foreign exchange volume with respect to the bid-ask spread is – 0.43.60 This could lead in his opinion to a fall in transaction volumes of 14 percent.61

However all three analysts argue that the effect will be concentrated on high-frequency trading, which is more associated with destabilizing effects on the financial sector and the macroeconomics, when compared to low-frequency trading.62

For the Committee of Experts on balance the impact on the volume would be minimal and focused on algorithmic high-frequency, momentum based trading strategies.63 On the other hand, the Committee observes that many regulators and analysts are concerned about potential negative effects of algorithmic trading on financial stability. Thus, some reduction of this trade could be beneficial for financial stability.64 The Committee also sees that potential impacts have to be set against the fact that total trading volumes have risen significantly over the last decades.

15.Avoiding double and non taxation?

A liberalizing electronic “tag” could be attached to the currency transaction on which the F(X)-Tax has been paid. This ensures legal certainty and avoids double or non taxation.

16.Conformity with international law

The catch-all of the leading world currencies and the low tax rate approach guarantee market neutrality for the F(X)-Tax to be in conformity with the provisions for free movement of capital and payments for goods and services embodied in the instruments of international and regional law (GATS, EU, etc).

Also an exchange of currencies is a capital transaction, not a payment for a financial service.65

60 Schmidt (2008), p. 461 Schmidt (2008, p. 1862 See Committee (2010), p. 19.63 See Committee (2010), p. 19 and Endnote 24.64 See Committee (2010), p. 19.65 See also Committee (2010), p. 28


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17.The fair spread requirement

A significant advantage of the F(X)-Tax is that even implementing the model only for one currency, such as British pound, the Euro, or the Japanese Yen, it would spread burden around the world to all those trading in this currency.

18.Stability and sustainability?

The foreign exchange tax could be implemented through the national tax authorities of the jurisdictions of each currency country. It is not unlikely that this could lead to problems with the revenue stability, because the tax base, the tax rate and the use of the tax money for funding the global public goods could dissipate over the time due to local erosion of the proceeds of the tax. The proceeds would flow into general government funds in the first instance and then being passed onto an international body. Thus, there is a clear risk that domestic spending pressures could undermine this transfer process and this brings into question the long-term predictability and stability of the F(X)-Tax as a source of revenue for funding the global public goods.66

Though this is a risk which any financial mechanism holds – the possibility of termination, cancellation or alteration/diversification, it might be possible to mitigate this risk. This will be discussed in the following chapter D II - Upgrading the F(X)-Tax: Conversion into a F(X)-Tribute

19.The motivation factor / acceptability by the givers?

The FX-tax is imperfect– as taxes in general can be, because it is not dedicated to a special purpose - a personal motivation factor for the givers. The clients and members of the exchange market cannot be sure that the tax is used for the planned goals. Additionally they don’t have any influence on how the proceeds, even if passed onto an international funding facility to reach the sustainable development goals (SDGs), will be spent. But also for the motivation factor we might find a way to boost it by conversion of the FX-tax into a FX-tribute (see the discussion in the following chapter D II).

II. Upgrading the F(X)-Tax:66 See Committee (2010), pp. 19-21.


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Conversion into a Foreign Exchange Tribute

1. The Foreign Exchange Tribute

A vitally important advantage of a tribute instead of a tax is that the collected money is earmarked by law to achieve special goals. Here the payments would equal a percentage of each single foreign exchange transaction, and the money would be directly transmitted from the customers of the currency market via the national banks to the international funding facility (FF). The payments of the financial sector to finance the sustainable development goals (SDGs) can be thought of as a tribute (fee/levy/contribution), applied to the global foreign exchange market for the financial benefits obtained by using and profiting from the existing global public goods, with the proceedings being used to fund the further protection and development of these goods.67

Through the earmarking of the revenues the risk of individual nation’s temptation to spend the money locally is widely eliminated. There is a direct path from the bearer through the third party collector and the national Central Banks to the funding facility.

This strengthens on the one hand the predictability and the sustainability of revenues for the financing of the global public goods.

On the other hand the tribute model instead of a tax system is expected to boost the willingness, cooperativeness, readiness and empathy of the participants of the foreign exchange community and of the financial sector in general to agree on this financing model. The payers can be sure, that their payments will be used to reach sustainable development goals, what at the same time boosts the economic growth68 - results, named as “inclusive growth” by the OECD or “impact investments” by other involved organizations.

Finally: If the international funding facility is additionally built in a way, that the givers have a voice in the executive board and are members of the oversight committee – what will be outlined in this chapter under III - the motivation kick might be a strong one.

Conclusion: The tribute model promotes solidarity and responsibility: the clients can connect emotionally with the funding, the dealer banks express a corporate social responsibility by organizing the collection and the transmission, and the governments and parliaments of the participating countries fulfill their duty to save the world by exploiting the legislative foundation for this model.

67 Similar Committee (2010), p. 25; see also in this proposal under B I 4, “The financial sector as partner”68 It is widely understood, that environment and development investments empower growth and stimulate the world economy.


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2. Steps of making the Foreign Exchange Tribute work

(1) Legislative foundation

The F(X)-Tribute has to be enacted as a specific legislature by the Parliaments of the participating currency-countries

(2) Implementation

The tribute is marked as part of the currency settlement and paid by clients while purchasing or selling currencies

(3) Central collection

Step 1: The third party agency that collects the purchase fee (e.g. CLS Bank, London) or the involved RTGS system collects the tribute from both legs of the currency exchange (buyer and seller)

Step 2: The third party agency passes the tribute directly to the funding facility (FF).

(4) Distribution

The funding facility (FF) distributes the revenues to regional bodies for development and environment projects.

III. Forming the Funding Facility

1. Task of the Funding Facility (FF)

The task of the funding facility (FF) is the financing of the sustainable development goals (see detailed discussion in this proposal under A 1).

2. Use of the financial means

The essential element of the funding facility (FF) is to focus on transparent and result-based financing of national-level projects both in developing as in developed


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countries without becoming involved in direct implementation. Programs usually could be selected on the basis of local requests and should be managed in partnership with the local public sector, the relevant civil society networks, and – as far as meaningful - the private sector.69

Impact investments, which take into account not only the viability of a project, but also their social and environmental effects are a good strategy for the spending. Another way would be a blended finance, which means using the FF-resources to leverage additional private funding.

3. Structure of the funding facility

The funding facility (FF) could be an additional task for the already existing and in chapter B 1 presented UNITAID or for a different, but similar shaped organization. Given the innovative nature of the funding facility not only to finance public health but the sustainable development goals on the whole, a parallel funding facility might be more appropriate.If new built, the funding facility, which has to uphold principles of accountability, democracy, fair representation and transparency, should have the following structure:70

Executive Board

The Executive Board would be the decision-making body. It determines the organization’s objectives, monitors progress and approves budgets. Decisions are made by majority votes. There should be three types of members with equal voting rights on the board:

one third representing the clients of the foreign exchange market, one third representing the participating countries, one third representing relevant civil society networks

(nongovernmental organizations and communities)

Secretariat

The Secretariat is led by an Executive Director and manages the day-to-day operations.

Oversight Committee

69 The Leading Group, FAQs – Innovative financing.http://www.leadinggroup.org/rubrique325.html70See similar in this proposal under B I ”About UNITAID”.


http://www.leading/

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The Oversight Committee would be assembled by the Central Banks of the participating countries.


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ABBREVIATIONS

BIS Bank for International SettlementsCLS Continuous Linked SettlementCTT Currency Transaction TaxGATT General Agreement on Tariffs and TradeGDP Gross Domestic ProductIDPF International Drug Purchase FacilityIFFIm International Finance Facility for ImmunizationIMF International Monetary FundODA Official Development AssistanceSWIFT Society for Worldwide Interbank Financial TelecommunicationUN United NationsWB World BankWTO World Trade Organization


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Acknowledgements

I am very grateful to Prof. Renee M. Jones, Associate Dean for Academic Affairs, Boston College Law School, for the revision of this proposal.

A deep thank-you goes to Dean Vincent Rougeau, Boston College Law School, and the former Dean John Garvey (now President of the Catholic University of America), who always were open minded and helpful for my work.

Prof. Filippa Marullo Anzalone, Associate Dean, and Director Michael I. Mitsukawa, Boston College Law Library merit a heartfelt thank-you for an immense organizational and personal support.

My innermost thanks go to Rev. Josef S. Costantino (SJ), St. Ignatius of Loyola Church, Chestnut Hill (Mass.), who advised me in many special ways and areas.


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