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It's not meant to be used for diplomacy because there is no incentive for two potential enemies to hand off territory for each other in a game where allied victory isn't really a thing.
You can vassalize another empire diplomatically by pulling ahead of them in tech, military and economy. Then you can integrate your vassal directly into your state. You get all of their territory and all of their citizens.
The option only exists for Multiplayer, between players who want to trade systems for various reasons.
In single player, the AI is literally hard coded to refuse transferring any systems to anyone who asks. Kind of like how asking an overlord to release you is a hard coded refusal UNLESS you have enough favours to outweight it.
I wish there was a "let me trade planets with AI empires (I promise it's for rp and not cheese purposes)" setting in the game launcher screen.
They can't make it any good at system trading, so they don't try at all. That'd be my guess at least.