How do tax treaties typically affect foreign income taxation?

Tax treaties are agreements between two countries that aim to prevent double taxation of income earned in one country by residents of another. By providing exemptions or lower tax rates on specific types of income, such as dividends, interest, and royalties, these treaties encourage cross-border investment and economic cooperation.

Option B is correct because tax treaties often establish specific provisions for how certain types of income should be taxed, resulting in either a complete exemption from taxes in the source country or a reduced tax rate. This is beneficial for individuals or businesses operating in multiple jurisdictions, as it helps mitigate the tax burden they might otherwise face on their foreign earnings.

The other options suggest various consequences of tax treaties that do not align with their primary purpose. For example, imposing additional taxes or requiring that all foreign income be taxed at the domestic rate would typically not be the intent of a tax treaty. Similarly, while some treaties can provide significant tax relief, completely eliminating taxes on foreign income is not a standard practice; rather, they aim to minimize the taxation to a reasonable level.