Oracle R12: The problem with using Legal Entities for Tax!

So, here is my problem. We have a client who has a UK legal entity but has several locations globally that are registered for local indirect tax and some other reporting but are not legal entities in their own right. According to Oracle, these are legal entity Establishments.

Oracle Definition of Legal Entity Establishment

“Legal Establishment: First party legal entities identify your organization to the relevant legal authorities, for example, a national or international headquarters. First party legal establishments identify each office, service center, warehouse and any other location within the organization that has a tax requirement. When you create a legal entity, the system automatically creates a legal entity establishment. You can create additional legal establishments according to your needs. For each legal establishment there are one or more tax registrations, depending upon the tax requirements of the applicable tax authority.”

More can be found at note 1064366.1

So what is wrong?

The main focal point here is “location within the organization that has a tax requirement”! So, they are saying that the primary focus of a legal entity establishment is for Tax. But….. at the time of writing, whilst documented, this does not actually work in practice!

Oracle development responded to an SR we raised with the following;

AP

“In AP: The Place of Supply ‘Bill To’ refers to the operating Unit and ‘Ship to’ refers to the Ship To Location mentioned at Line level.”

So no mention at all of a legal entity, let alone a legal entity establishment! Your BILL TO is linked to the address of your Operating Unit. So what if you have an Operating unit with 100 US legal entities all in different states? You better make sure you use the SHIP TO is the answer! So not having a SHIP TO is not an option in this situation. But what about a UK OU which is registered for GB VAT but also AU GST? There is a scenario where the Australian (AU) legal entity establishment could be buying product from China but shipping it directly to a client or inter-company location in New Zealand The bill and ship from is supplier in China, the Bill to is the UK as the Operating Unit has a UK address and the SHIP TO is New Zealand. None of these locations can be used for the place of supply to ensure the AU GST kicks in!

The legal entity is still essential for tax set ups – the registration details linked to the legal entity still play a major roll and if you only have one legal entity establishment to every legal entity then there won’t be any issues at all.

 AR

“In AR: The place of Supply ‘Bill from’ refers to LE Address and ‘Ship from’ refers to the warehouse.”

Great, we are moving somewhere, the bill from is the legal entity address. But what if I want to sell a service from the Australian Branch to my customer in New Zealand? SHIP FROM does not exist as we are selling a service (and many clients don’t have inventory so there are no SHIP FROM locations), the BILL FROM is the UK as the Legal Entity address is in the UK, the branch is in Australia. The SHIP TO and BILL TO are in New Zealand. So again, where do we take the place of supply from to generate the AU GST?

Setups to show where bill from comes from

So below is the transaction type where a legal entity can be chosen – note that it is only the legal entity and no establishments are available.

Oracle tax

But if we look at the OU used, the address linked to the OU is actually the bill from address in AR and the BILL TO Address in AP!

oracle tax

Conclusion

At the moment you cannot use the Legal Entity Establishment for what it apparently was designed for, which is for tax. Oracle need to change the AR solution so that the transaction type can have the Legal Entity Establishment linked to it rather than just the Legal Entity. For AP, something similar is needed but not sure what, as the Legal Entity is not even used at this stage for the location of the BILL TO. We will update our white paper ‘One or multi OUs’ because even it does not matter how many Legal Entities or establishments you have, the system only takes the address from the OU for the BILL FROM in AR and BILL TO in AP!

As soon as we have a response from the SR we will update this blog.

Of course you can create the AU GST regime and set the country as United Kingdom but then we are heading down a nasty path that we should not need to.

Andrew Bohnet
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Andrew Bohnet

Managing Director and Oracle Fusion Tax / eBTax expert at eBiz Answers Ltd
Andrew Bohnet is the current chair for the Oracle Tax Management SIG. He founded eBiz Answers to offer clients complete tax solutions making the most of the rich functionality of the R12 and Fusion tax modules. Whether it is analysis, design, configuration or support, eBiz Answers provide an unparalleled service when it comes to a complete tax solution. Having worked on one of the first Oracle R12 implementations in Europe, Andrew was exposed to the tax module early on and worked closely with Oracle to fix bugs, enhance functionality and present on numerous occasions on the subject of tax and Oracle. When it comes to presenting on eBTax, you wont find a more experienced consultant outside of Oracle.
Andrew Bohnet
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