Article 5 of the MLI contains provisions that provide three options for the elimination of double taxation. Countries may choose to address cases of double non-taxation that may where countries use the exemption method to prevent double taxation of income that is not taxed in the State of the source. OECD model convention provides two methods for the elimination of double taxation.
Typically, treaties either adopt the exemption method or the credit method to ensure that the same item of income is not taxed twice in the same person’s hands in two different jurisdictions. In the exemption method, an income taxable in another State is generally exempted from taxation in its State. Whereas under the credit method generally, a tax credit is given equivalent or proportionate to the amount of tax paid in the other State, which can be set off against tax payable in its resident State.
However, double non-taxation may arise due to disagreements between the State of residence and the State of source on the facts of a case or the interpretation of the provisions of a bilateral tax treaty. To cap such an instance, Article 5 of MLI introduces the methods for the elimination of double taxation.
Alternatively, while the income could be liable to tax in the other state/source state, it is not subject to tax. In such a situation, the use of the exemption method may result in an obligation on the State of residence to exempt such income, and therefore double non-taxation. To prevent such instances of double non-taxation, the MLI has provided the following options for countries to choose from. Overall, these options show a marked shift or preference towards tax credit mechanisms over the exemption method.
To read the detailed explanation on Article 5 of MLI – Click here.
For an easy understanding of the impact of Article 5 of MLI on the CTA, refer to the below flowchart.

The summary of three option provided under Article 5 of MLI are as follow:
Option A (paragraph 2 of Article 5 of the MLI) is based on Article 23A(4) of the OECD Model Convention and provides that if an item of income is taxed in the source state, the residence state will not be completely exempt it. Instead, the State of residence shall deduct an amount equal to the tax paid in the State of source against tax payable against the same income in the State of residence. Option A is not intended to apply in situations where the provisions of a Covered Tax Agreement grant exclusive taxing rights to the contracting jurisdiction of residence for specific types of income.
Option B (paragraph 4) allows contracting states to not apply the exemption method to dividends that are deductible in the contracting jurisdiction of the payer (State of source).
Option C reflects the credit method for the elimination of double taxation and is based on Article 23B of the OECD Model Tax Convention.