Tax competition for mobile tax bases, capital in particular, has received increasing attention in recent years not least because de jure and de facto capital mobility has risen. It is frequently argued that the attraction of mobile capital ceteris paribus creates welfare gains for a country as additional tax revenues accrue and/or the domestic capital and technology stocks increase. Thus, it is not surprising that countries strive to increase capital stock within their borders. There are two largely distinct bodies of literature and corresponding research areas in international taxation. On the one hand, there is the big and continuously growing body of theoretical and empirical literature on tax competition, 2 mainly in the field of economics; on the other, there is a large body of mostly legal literature dealing with international double tax avoidance. 3 The fact is, however, that there are only very few contributions which address both issues at the same time. 4 This article tries to narrow this gap. Specifically, this chapter addresses the issue of why measures of double tax avoidance, even though they comprise measures of bilateral tax coordination, may actually act as instruments of tax competition. 5 The rules of double tax avoidance (henceforth DTAV) are contained in bilateral double tax treaties (DTTs), in domestic tax rules and, in the European Union (EU), in supranational tax laws. All these different levels of rules are influenced by conventions promoted by international organizations. This set of rules is designed to ensure that international investments are not over-taxed in comparison with national investments. The goal is to achieve "single taxation" by coordinating different countries' taxing rights so as to avoid jurisdictional overlap. However, one consequence of the way DTAV rules are constructed and the way the various 1 The part on hybrid instruments in Section 2.2 was drafted by Martin Six. We are grateful to Julia Braun who helped in the collection and the analysis of empirical papers. 2 See inter alia Wilson and Wildasin (2004) and Hochgatterer and Leibrecht (2009). 3 See inter alia Lang (2003). 4 See inter alia Roin (2008). 5 Nota bene: We emphasize tax avoidance by multinational firms and tax competition for investments by firms. 6 Note here that vis-à-vis capital the behaviour of the home country as well as that of the host country has to be considered. Thus there are three actors in the tax competition game, namely, firms, the home country government and the host country government (see also Altshuler and Grubert 2005). 7 Wilson and Wildasin (2004). 8 Also see Bellak and Leibrecht (2008). 9 Among the seminal papers in this respect is Devereux et al. (2004). 10 Also see Altshuler and Grubert (2005).
