Quick Answer: Local vs Regional Comparables
Same-market comparables are often more reliable. Use comparables from the same country as your tested party whenever they're reasonably available. Many tax authorities prefer local data because it reflects the same economic conditions, regulatory environment, and market dynamics—though some (e.g., UK, Netherlands) state no formal domestic preference.
Regional comparables are acceptable when:
- Local search yields fewer than approximately 5 comparable companies
- The tested party operates across a regional market (e.g., European headquarters)
- The regional market can be argued to be homogeneous in the relevant industry
- Local data is insufficient due to database or market limitations
Decision Framework:
| Situation | Use | Documentation |
|---|
| Sufficient local comparables exist (5+) | Local only | Standard search documentation |
| Fewer than 5 local comparables | Local + Regional | Justify expansion, show local search attempt |
| Tested party serves regional market | Regional | Document business model and economic homogeneity |
| Japan tested party | Domestic preferred | Foreign needs stronger justification |
| India tested party | No formal preference | Domestic commonly used; foreign may be disputed |
| Small EU country (Luxembourg, Belgium) | Pan-European | Often accepted given integrated market |
For related guidance, see our PLI Selection Guide and Benchmarking Study Guide.
What Are Local vs Regional Comparables?
In transfer pricing benchmarking, you search for independent companies to compare against your tested party's profitability. The geographic scope of that search matters significantly.
Local Comparables: Companies from the same country as the tested party (same tax jurisdiction). These inherently reflect the same economic conditions—purchasing power, competition level, regulatory environment, cost structures.
Regional Comparables: Companies from multiple countries within a broader geographic area—such as Pan-European, ASEAN, or Latin American sets. These expand the pool but introduce potential geographic differences.
The fundamental trade-off is quality vs. quantity: a smaller set of high-quality local comparables is usually preferable to a larger set of distant comparables requiring adjustments.
OECD Position: Most Reliable Information
The OECD Transfer Pricing Guidelines take a nuanced position on geographic scope.
Markets Matter
The OECD emphasizes that geographic markets can significantly affect arm's length prices:
"Arm's length prices may vary across different markets even for transactions involving the same property or services."
The OECD stresses using the most reliable available information and cautions against letting compliance simplification dictate search criteria—while acknowledging that local comparables are not always available (¶5.46). The geographic market determination should reflect where economic conditions are substantially the same, which may be one country or several.
Key point: Using regional comparables simply because it's easier (one pan-regional search) is not appropriate when better local data exists. However, "local" is not automatically "more reliable"—the assessment depends on the specific facts.
Regional Is Acceptable When Justified
The OECD acknowledges that regional markets can be appropriate. Paragraphs 1.132–1.133 state that if an MNE's controlled transactions occur in several jurisdictions with "reasonably homogeneous economic circumstances," a multi-jurisdiction analysis can be appropriate:
"For some industries, large regional markets encompassing more than one country may prove to be reasonably homogeneous."
US Treasury Regulations
US Treas. Reg. §1.482-1(d)(4)(ii)(A) provides explicit guidance:
Uncontrolled comparables "ordinarily should be derived from the geographic market in which the tested party operates."
Practical reading when local comparables are unavailable:
- First choice: Same geographic market comparables
- Second choice: Different market comparables with appropriate adjustments
- Last resort: Most similar market for which data is available—acknowledging greater uncertainty
Note: This is a practical interpretation, not a formal hierarchy stated in the regulation.
Tax Authority Preferences by Jurisdiction
Tax authorities vary significantly in their stance on local vs. regional comparables. The table below reflects OECD Transfer Pricing Country Profile Q8 responses plus practical observations:
| Country | OECD Profile Q8 | Practice Notes |
|---|
| Japan | Preference: Yes | Domestic comparables preferred; foreign needs stronger justification |
| India | Preference: No | No formal preference; domestic commonly used; foreign may be disputed |
| Thailand | Preference: No | No formal preference per OECD profile |
| Australia | Preference: Yes (qualified) | Domestic preferred "all things being equal"; often expects explanation for foreign |
| China | Prefers local | Regional APAC acceptable case-by-case |
| Germany | Preference: No | Practice often focuses on comparable markets; domestic may be more persuasive |
| Netherlands | Preference: No | Pan-European accepted if geographic differences don't materially affect comparability |
| UK | Preference: No | Preference for comparable markets based on transaction characteristics and availability |
| Small EU | Varies | Pan-European often accepted given integrated market and data limitations |
| Brazil | New OECD-aligned (2024) | Under new regime: local preferred, foreign allowed with adjustments |
| Poland | Preference: Yes (qualified) | Often higher scrutiny for foreign benchmarks |
Japan: Domestic Preferred
Japan's OECD country profile indicates a preference for domestic comparables. Using Asia-Pacific or global sets while Japanese comparables exist may be challenged. The rationale: Japan's market features—quality standards, consumer preferences, cost structures—are often best reflected by domestic companies.
Practical guidance: Start with Japanese comparables; document carefully if expanding to regional.
India: No Formal Preference, Practical Disputes
India's OECD country profile indicates no formal preference for domestic over foreign comparables in the legal framework. However, in practice, foreign comparables may be disputed depending on the facts and circumstances.
Practical guidance: Domestic comparables are commonly used and may reduce dispute risk. Indian databases like Prowess or AceTP provide good local coverage.
Thailand: No Formal Preference
Thailand's OECD country profile indicates no formal preference for domestic comparables. Regional ASEAN comparables may be acceptable depending on facts and circumstances.
Australia: Domestic Preferred When Available
The Australian Taxation Office's OECD country profile indicates domestic comparables are preferred "all things being equal," but acceptance depends on circumstances and data availability. Foreign comparables may require a clear explanation of why they were used.
Practical guidance: Australia often benefits from better domestic private-company availability than many countries, depending on databases used.
Netherlands: Pan-European Accepted
Dutch authorities explicitly state no domestic preference per the OECD country profile. Pan-European comparables are accepted "as long as geographic differences have no material impact on comparability." Pan-European sets are standard practice in the Netherlands.
UK: Comparable Markets Approach
The UK's OECD country profile states no domestic preference, but adds a preference for comparable markets based on transaction characteristics, market characteristics, and data availability. HMRC regularly accepts benchmarks mixing UK and continental European companies. Commonly used databases include FAME, Amadeus, and OneSource.
Small EU Countries
Luxembourg, Belgium, Ireland, and other small EU countries often rely on pan-European sets due to limited local data. This is often accepted given the integrated EU market, but practices vary by country.
When Local Comparables Are Required
Conditions Making Local Preferred
- Local preference in country profile: Japan (preference), Australia (preference), Ukraine (must prove foreign more reliable)
- Sufficient local comparables exist: If you can find approximately 5+ good local companies, use them
- Market-specific factors differ significantly: When local conditions diverge from regional norms
- Regulated industries: Where local regulations directly affect profitability
What Is "Sufficient"?
There's no magic number in OECD guidance or most country regulations. However, practitioner consensus suggests:
- ~5-10 comparables: Generally considered sufficient for a local search
- Below 5: Consider regional expansion
- Quality trumps quantity: 4 highly comparable local companies may be better than 15 loosely comparable regional ones
The OECD prioritizes reliability over quantity—there's no requirement to perform an "exhaustive search of all possible sources" once you have sufficient reliable data.
Definition of "Local"
"Local" typically means same country as the tested party (same tax jurisdiction).
US exception: US regulations define "geographic market" as any area where economic conditions are substantially the same—which may include multiple countries if conditions are similar.
EU context: Pan-European is sometimes treated as quasi-local due to the single market, but it's formally still "regional."
Rule of thumb: Assume "local = same country" unless told otherwise by the jurisdiction.
When Regional Comparables Are Acceptable
Primary Justifications
-
Insufficient local data: The primary reason for regional expansion. If local search yields fewer than approximately 5 usable comparables, expansion is justified.
-
Tested party's business is regional: If the tested party operates across a region (e.g., European hub serving multiple EU markets), regional comparables may better reflect its market.
-
Comparable economic circumstances: If countries in the region have no material differences in relevant economic factors—or differences can be adjusted for.
-
Small or developing market: If the tested party is in a small economy with a niche industry, you may have no choice but to use regional or analogous market comparables.
Commonly Used Regional Groupings
| Region | Typical Grouping | Notes |
|---|
| Pan-European | EU + EFTA | Accepted in many countries (NL, UK explicitly); varies by country |
| Nordic | Sweden, Norway, Denmark, Finland | Frequently pooled; similar economic profiles |
| Benelux | Belgium, Netherlands, Luxembourg | Commonly grouped |
| North America | US + Canada | Usually expect local first due to large databases |
| LATAM | Latin American countries | Common due to data limitations |
| ASEAN | Southeast Asian countries | More variability; depends on industry and country |
| Pan-Africa | African continent | Often necessary due to data scarcity |
Documentation Justifications
When using regional comparables, document:
- Local search attempted: "Initial attempts to identify suitable local comparables in [Country] were not successful..."
- Why local insufficient: "Only 2 companies met the criteria, which was insufficient for a meaningful range..."
- Regional grouping rationale: "The search was extended to include [Region] because these economies are all [similar characteristics]..."
- Economic homogeneity evidence: "Analysis of industry profit levels showed no significant difference between [Country A] and [Country B]..."
- Adjustments considered: Document any adjustments made or explain why none were needed
Geographic Risk Adjustments
When using comparables from significantly different economic environments—particularly developed market comparables for an emerging market tested party—consider geographic risk adjustments.
What Are Geographic Risk Adjustments?
Modifications to comparable financial metrics to account for systematic differences in:
- Risk profiles between locations
- Cost structures (location savings)
- Expected returns in different economic environments
When to Consider Adjustments
| Consider Adjustment | Skip Adjustment |
|---|
| Using developed market comps for emerging market tested party | Reliable local comparables available |
| Material country risk profile differences | Regional market demonstrably homogeneous |
| Significant cost structure differences | Adjustment methodology would be unreliable |
Mexico's EMBI-Based Adjustment
Mexico's SAT has published FAQ guidance commonly cited as an EMBI-based country risk adjustment. The approach is widely referenced by practitioners, though its technical basis and precise application are debated in the profession (IMCP has questioned the technical support).
Commonly Reproduced Approach:
The SAT FAQ approach is often described as applying the country risk adjustment to the sales/denominator of the comparable:
- Country Risk Adjustment = Average Operating Assets × Mexico EMBI Spread
- Adjusted Sales = Reported Sales + Adjustment
This differs from some interpretations that adjust operating profit directly. Practitioners should verify the current SAT position.
Example (illustrative): If a US comparable has $10M average operating assets and Mexico's EMBI spread is 2%:
- Adjustment = $10M × 2% = $200K
- This adjustment is then applied to comparability metrics per SAT guidance
Tax Authority Positions on Adjustments
| Country | Position |
|---|
| Mexico | SAT FAQ guidance on EMBI adjustment; often raised in audits; application debated |
| Australia | Avoids mechanical adjustments; prefers qualitative analysis |
| South Africa | Skeptical of adjustments; prefers qualitative approach |
| US | Built into comparability concept; adjust for significant differences if possible |
| China | May adjust for location savings; especially if foreign parent benefits from China cost savings |
OECD Caution
The OECD advises: make adjustments only if they "can be expected to increase the reliability of the results." Too many or too subjective adjustments can undermine credibility. If adjustments are so large they signal the comparables weren't really comparable, the analysis fails.
Database Coverage Considerations
Database coverage directly affects whether you can find local comparables or must go regional.
Major Databases
| Database | Strong Coverage | Weaker Coverage |
|---|
| Orbis/TP Catalyst (BvD) | Europe, North America, major Asia | Small emerging markets, Africa |
| Amadeus (BvD) | Europe (including private companies) | Rest of world |
| FAME (BvD) | UK (detailed private company data) | Outside UK |
| Compustat (S&P) | US, developed markets (public) | Emerging markets, private |
| Capital IQ (S&P) | Global listed companies | Private companies |
Local Specialist Databases
| Database | Country | Notes |
|---|
| Prowess/AceTP | India | Essential for India searches |
| JADE | Japan | Japanese private companies |
| WIND/CSMAR | China | Complements Orbis |
Coverage Impact
- Well-covered markets (Europe, US, major Asia): Local searches usually yield sufficient comparables
- Data-scarce markets (small countries, emerging markets, Africa): Regional expansion often necessary
Practical reality: Database coverage gaps are a primary driver of regional searches—not just a theoretical consideration.
Secret Comparables Issue
In China, SAT has access to "secret comparables"—data taxpayers cannot access (confirmed in OECD country profile Q9). Just because your database search yields limited local data doesn't mean the authority is equally limited.
Practical Scenarios
Scenario A: Large Market, Local Preferred (Germany)
Facts: German distributor tested; Germany has robust database coverage.
Approach:
- Search Amadeus with country = Germany
- Find approximately 12 German distributors meeting criteria
- Use Germany-only set
Common audit question: If pan-EU presented when German comparables existed, auditors often ask "Why not German companies?"
Scenario B: Small EU Country, Regional Accepted (Belgium)
Facts: Belgian manufacturing subsidiary; local search yields only 2 Belgian companies.
Approach:
- Document Belgian search yielded insufficient results
- Expand to Benelux + Germany + France
- Final set: 10 companies from Western Europe
- No country-risk adjustment (all developed EU economies)
Practice observation: Regional expansion is often seen in Belgian filings given the integrated EU market.
Scenario C: Regional with Risk Adjustment (Mexico)
Facts: Mexican contract manufacturer; suitable comparables found mostly in US.
Approach:
- Compile 8 US manufacturing companies
- Consider country risk adjustment per SAT guidance
- Document adjustment methodology if applied
- Test Mexican entity against adjusted range
Practice observation: Country risk adjustments are commonly raised in SAT audits when US comparables are used.
Scenario D: No Local Data, Analogous Markets (Kenya)
Facts: Kenyan IT services subsidiary; virtually no Kenyan company financials available.
Approach:
- Document exhaustive local search
- Use comparables from India and Philippines (similar service industries, cost structures)
- Justify based on similar development level
Practice observation: In data-scarce markets, audits often focus more on functional comparability and the justification for proxy markets.
Documentation Best Practices
For Local Comparables Search
- Search criteria: Country filter, industry codes, revenue range
- Database(s) used: Name the sources
- Results at each stage: "50 hits → 25 after screens → 7 final"
- Rejection reasons: Why local companies were excluded
- Confirmation: Statement that all relevant local companies were included
Additional Requirements for Regional Search
-
Justification narrative (early in Local File):
"A search for comparables solely within [Country] yielded only 2 companies, insufficient for meaningful analysis; therefore, the scope was expanded to [Region]."
-
Local search attempt evidence: Show you tried local first
-
Geographic criteria: Which countries included, which excluded, and why
-
Economic homogeneity support: Evidence regional market is comparable
-
Adjustment documentation: Method, source data, before/after impact
Related Topics
Guides:
- Benchmarking Study Guide — Comprehensive overview of transfer pricing benchmarking
- Comparability Adjustments Guide — Country risk and other adjustments
- PLI Selection Guide — How to choose between Operating Margin, Berry Ratio, ROA
- Quantitative Screening Filters — Database screening best practices
Glossary:
- Comparable Companies — Selection criteria and process
- Comparability Analysis — The 5 factors framework
- Country Risk Adjustment — Geographic risk premiums
- NACE Code — Industry classification system
FAQs
How many local comparables do I need before using regional?
There's no strict number, but practitioner consensus suggests approximately 5 comparables as a reasonable threshold. Below that, consider regional expansion. However, quality matters more than quantity—4 highly comparable local companies may be better than 15 loosely comparable regional ones. Document your reasoning either way.
Can I mix local and foreign comparables in one set?
Yes, this is commonly done and generally acceptable. Include all good local comparables, then supplement with regional to reach a reasonable sample. Disclose which comparables are domestic vs. foreign and address any systematic differences in results. If foreign comparables show systematically different margins than local ones, investigate why before combining.
Our tested party operates across multiple countries—do we need local comparables in each?
If doing separate analyses per country entity, normally use local comparables for each country. If the tested party is a combined regional entity (e.g., European hub with branches), a regional set may be appropriate—but document the business model and economic homogeneity. Best practice: include at least some local comparables per country with material intercompany transactions.
Do I need to adjust regional comparables for geographic differences?
Evaluate whether material differences exist. If comparables are from similar countries (e.g., within EU), you may conclude no adjustment is needed—but document that conclusion explicitly. If using developed-market comparables for an emerging-market tested party, consider country risk or cost adjustments. In Mexico, SAT guidance on EMBI-based adjustments is often raised in audits when foreign comparables are used.
What if the tax authority rejects my regional approach?
Understand the reason for rejection:
- If they believe local was available: Revisit your analysis; possibly conduct a fresh local search
- If they want adjustments: Engage on how to refine the analysis
- If contentious: Present dual analysis (local-only vs. local+regional) showing the conclusion holds either way
Consider MAP or APA for future disputes. Show flexibility—often compromise involves incorporating some local comparables the authority suggests.
How should I document my geographic search strategy?
Include a clear section titled "Comparable Search Strategy" that:
- States the local search was conducted first
- Explains the outcome and why it was insufficient
- Describes the regional expansion and rationale
- Cites OECD support (¶1.132 on homogeneous regional markets)
- Includes any adjustments or homogeneity evidence
- Provides appendix with flowchart or list of all comparables considered with their countries
Which databases should I use for local searches?
Depends on the country:
- Europe: Amadeus, Orbis, FAME (UK & Ireland)
- US: Compustat, Capital IQ, Orbis
- India: Prowess, AceTP
- Japan: JADE, Orbis (Japan filter)
- China: WIND, CSMAR, Orbis
- Australia: Orbis (Australia filter)
Use multiple databases if needed to ensure you haven't missed local comparables. Document which databases were used in your report.
What's the difference between "local" and "domestic" comparables?
These terms are generally used interchangeably in transfer pricing—both mean comparables from the same country as the tested party. The US regulations technically define "geographic market" more broadly (any area with substantially similar economic conditions), but in practice, most jurisdictions treat "local" as meaning "same country."
