What is the primary purpose of tax treaties?

The primary purpose of tax treaties is to prevent double taxation and promote economic cooperation. Tax treaties are agreements between two or more countries that aim to allocate taxing rights over the income generated by residents or entities operating across borders. They delineate which country has the right to tax specific types of income, such as dividends, interest, and royalties, thereby preventing the same income from being taxed by multiple jurisdictions.

By doing so, tax treaties foster a more predictable and stable tax environment for international investments and trade, encouraging economic cooperation between countries. This is crucial because without such treaties, businesses and individuals engaging in cross-border activities risk being taxed in more than one country, which could deter investment and complicate cross-border operations.

The other options describe important but different aspects of international relations and economic transactions. International banking systems and trade agreements serve specific purposes but are not the primary function of tax treaties. Additionally, standardizing global income tax rates is not practical or achievable given the varying economic contexts and policy priorities of different nations.