Regional vs Local Comparables: Geographic Scope and Authority Views

The default pool is local: comparables from the market in which the tested party operates, because the local market is where the tested party’s functions are actually performed and its prices actually formed. The default has an OECD exception, a hard boundary, and a live tension with how Indian authorities read it.

The OECD rule: multi-regional search

The Guidelines permit — and in some cases direct — a multi-regional search where the relevant market for the transaction is not a single local market. The situations:

Situation	Why the local market is not the market
Global marketing / global customer base	The reseller or service provider sells into multiple regions; the comparable economic environment is the aggregate
Commodities and globally priced inputs	The price forms globally; the local pool prices a different thing
Thin local market	The local industry is too small for a meaningful pool; the next-widest market with the same economic conditions is the fallback
Cross-border services delivered to a global customer	The service competes (and is priced) against non-local providers

The test is economic, not convenient: the question is whether the comparable companies in the wider market operate under comparable economic conditions to the tested party — same market forces, same customer behaviour, same competitive dynamics. A wider pool that changes the economic environment is not a multi-regional search; it is a range search with a geography attached.

The hard boundary: tax differentials

The OECD position is explicit and frequently cited: differences in tax regimes alone do not make markets non-comparable. A lower-tax jurisdiction does not, by itself, disqualify its companies from the pool — the tax difference is not a comparability factor in the standard sense (it is addressed through the PLI’s tax treatment and, where material, an adjustment). This cuts in both directions: the taxpayer cannot exclude a foreign pool because its tax is lower, and the authority cannot include one purely because its companies earn more pre-tax.

In practice the boundary is doing more work than the text suggests, because tax differentials are rarely the only difference: a pool from a different market brings different cost structures, wage levels, input prices and competitive dynamics. The defensible use of a foreign pool is where those economic conditions are genuinely comparable — or where the differences are identified and adjusted — not where the tax outcome is preferable.

Indian TPO practice

The Indian examination reads the geography question strictly, and the positions are predictable:

• The default is the Indian pool. For an Indian tested party, the TPO expects Indian comparables — the local market is where the function is performed, the Indian filings are the verifiable source, and the Indian pool is the pool the TPO can reconstruct. A file that builds its range on a foreign pool for a function performed in India starts behind.
• The “Indian market” argument. Where the tested party sells into India (or performs in India on Indian inputs), the TPO’s position is that the relevant market is India, and the multi-regional exception does not apply — the global-customer argument is met with “your costs, your risks and your functions are Indian.”
• Cross-border fact patterns are the exception that works. Where the transaction is genuinely cross-border — a service delivered to a non-Indian customer that competes with non-Indian providers, or a reseller whose customer base is global — the multi-regional (or foreign) pool has a real argument, and it is the fact pattern where the economic-conditions test is actually run in the file.
• The push-back pattern. The common sequence: the taxpayer’s pool includes foreign comparables that extend the range favourably; the TPO rebuilds the pool on Indian companies only; the range moves; the adjustment follows. The defence is the economic-conditions analysis written before the examination — why the foreign comparables are the right market, what is comparable about their conditions, and what was adjusted for what was not.

Designing the geographic decision

The decision is a documented step in the search design, not an afterthought:

1. State the relevant market for the transaction — local, multi-regional or foreign — with the economic reasoning.
2. Run the local pool first. It is the default, it is the verifiable pool, and its result is the anchor the wider pool has to explain itself against.
3. Widen only on the economic test. Where the local pool is used, the file says why the local market is the market. Where it is widened, the file says which economic conditions make the wider comparables comparable, and what was adjusted for the conditions that were not.
4. Show both ranges. Where the local and the wider pools give materially different ranges, the file presents both and states which one tests the tested party and why — a single range with the other silently discarded is how the geography question becomes an adjustment.
5. Keep the tax argument out of it. The pool’s geography is decided on economic conditions. The tax differential is noted where material (it can affect the PLI comparability) but it is not the reason, and a file that reaches for it as the reason has identified its own weakness.

See also

• Search design
• Quantitative screening
• Comparability adjustments
• India TP overview