What is the main purpose of a double tax treaty?

The primary aim of a double tax treaty is to prevent the same income from being taxed twice in different countries. This is important for fostering international trade and investment, as it helps to eliminate the financial burden on businesses and individuals who might otherwise face double taxation on their earnings in various jurisdictions. By establishing clear rules on tax liabilities, these treaties ensure that individuals and companies are not deterred from earning income across borders due to the fear of being taxed multiple times.

Double tax treaties typically outline how taxation rights are divided between the involved countries, which may include provisions for reducing withholding taxes on dividends, interest, and royalties. They can provide clarity on residency status and the treatment of different types of income, making it easier for taxpayers to understand their obligations and reducing the risk of tax disputes between countries.

The other options do not accurately reflect the primary function of these treaties. Increasing tax rates would be counterproductive to the agreements' purpose, while providing tax relief for specific businesses is a narrower focus that doesn’t encapsulate the overall goal of avoiding double taxation. Simplifying the tax filing process is not the main purpose, though such treaties can indirectly contribute to a clearer understanding of tax obligations.