Mike,
I've just done a few searches and couldn't seem to find any whitepapers describing the topic.
However, it makes sense that it would use local time. The location the Group Policy is set in makes no difference to the policy which is applied down to the computer - all the computer knows is that at a designated time of day it must download and install updates. This check is performed on the computer, and the only time the computer has available to it is its local time which includes the modifications for the appropriate time zone.
Being in the UK which is on a single time zone, I seldom have to deal with time zone issues, but clients with overseas offices can be a pain!
-Matt