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the Organization for Economic Cooperation and Development (OECD) and others for theexchange of information and the elimination of tariffs.Below we will discuss very generally the primary federal and local taxes existing inMexico.2. Income TaxIn contrast to other countries, Mexico has not been able to increase the importance ofits indirect taxes such as the Value Added Tax (VAT), and therefore currently the largestportion of tax revenue comes from direct taxes, the most important of which is theincome tax (Impuesto Sobre la Renta, ISR).2.1. Persons Obligated to Pay Income Tax112C H A P T E R V I IAccording to the Income Tax Law (Ley del Impuesto Sobre la Renta, ISR Law), tax residentsin Mexico are obliged to pay income tax on all income (in cash, credit, goods, services,or of any type) earned in Mexico and in any other part of the world.Tax residents of a foreign country only have to pay income tax in Mexico when theyhave a permanent establishment in Mexico or when they obtain earnings that are consideredto come from a source of wealth located in Mexico.In view of the above, the concepts of tax resident and permanent establishment shouldbe clarified.2.1.1. Tax residency in MexicoIndividuals are considered to have tax residency in Mexico when their residential home is inMexico. When individuals have several houses in different countries, they will be consideredto be a resident in Mexico when they have their vital center of interest in the country.Legal entities are tax residents in Mexico when they have established in Mexico the principalcorporate headquarters of their business or their actual center of decision making.Tax residency is a concept that can be affected by the double taxation treaties thatMexico has signed, as these treaties contain specific conflict resolution rules to resolvethe problems that arise when both contracting countries consider the same person to bea tax resident.2.1.2. Permanent establishmentThe general concept of a permanent establishment set out in the ISR Law refers to whena nonresident falls into one of the following three categories:a) Having a place of business in Mexico in which some or all of his/her business activitiesare carried out;