What is the primary purpose of a tax treaty?

The primary purpose of a tax treaty is to avoid double taxation and prevent tax evasion. Tax treaties are agreements between countries that clarify which country has taxing rights over various types of income, such as dividends, interest, and royalties. By outlining these rules, tax treaties help ensure that individuals and businesses are not taxed on the same income by both countries, which can happen when cross-border transactions occur.

This mechanism promotes international trade and investment by providing clarity and reducing tax liabilities for entities and individuals operating across borders. It also helps mitigate tax evasion, as treaties often include provisions for the exchange of information between tax authorities, making it harder for individuals to hide income from tax agencies.

The other options, while related to international tax issues, do not capture the main purpose of tax treaties. For instance, regulating corporate tax rates, dictating specific rates of individual income tax, or standardizing business tax deductions do not reflect the fundamental aim of tax treaties, which is centered around avoiding double taxation and enhancing cooperation between countries in tax matters.