One of the key considerations in structuring merger and acquisition (M&A) transactions is determining which contracts of the target company, if any, will remain in effect for the acquiror following closing. This post will briefly outline: (1) the general rules of contract assignment; (2) the effect of anti-assignment clauses and other exceptions to the general rule of assignability; and (3) the effect of four common M&A structures on contract assignment.
General Rule: Contracts are Freely Assignable
The general rule is that contracts are freely assignable unless the contract itself, a statute, or public policy dictates otherwise. This is true in Washington State, where courts have found that contractual rights are generally transferable unless the contract expressly prohibits assignment in “very specific” and “unmistakable terms.”
Exceptions to the General Assignability Rule
The exceptions to the general rule of free assignability fall into two broad categories: (1) contractual prohibitions on free assignability (“anti-assignment clauses”) and (2) case law prohibitions on free assignability of certain types of contracts that arise out of public policy concerns.
In light of the general rule of free assignability, most business contracts contain a clause – commonly referred to as an “anti-assignment clause” – that expressly prohibits the assignment of contractual rights without the consent of the other party to the contract. These anti-assignment clauses typically take one of two forms. The first, which we will call “simple” anti-assignment clauses, simply prohibit the contractual right from being assigned without the consent of the other party to the contract. For example, a simple anti-assignment clause might state:
This contract shall not be assigned or transferred by Party X without first obtaining the consent of Party Y.
While simple anti-assignment clauses are generally enforceable, certain types of M&A deal structures effectively circumvent such provisions and, accordingly, the necessity of third-party consents (see the discussion below regarding the impact of M&A deal structures on contract assignment for more detail).
Comprehensive Anti-Assignment Provisions
In response to the inability of “simple” anti-assignment clauses to protect contractual rights in certain M&A contexts, many contracts include more robust anti-assignment provisions designed to require third party consent prior to an M&A event, even where the content itself will not be transferred. For example, a comprehensive anti-assignment clause might state:
Party X shall not assign this Agreement in whole or in part without Party Y’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Any change in control of Party X resulting from a merger, consolidation, stock transfer or asset sale shall be deemed an assignment or transfer for purposes of this Agreement that requires Party Y’s prior written consent.
Courts will generally enforce these types of comprehensive anti-assignment clauses and conclude that consummation of a change of control transaction without consent is a breach of contract. Accordingly, to assign contracts with comprehensive anti-assignment provisions, the target must seek the consent of the counterparties to each such contract. Obtaining third party consents in connection with M&A transactions may create sticky situations or cause costly delays. The target company may not want their customers, suppliers or others to know that they are going through an M&A event, while the acquiror may want assurances that important contracts will remain in place. What is more, certain contract counterparties may use the leverage of their consent to renegotiate the terms of the contract or extract concessions from the target company. Accordingly, it is important that the parties identify and address comprehensive anti-assignment clauses early in the process – particularly where the contracts to be acquired make up a large portion of a target company’s value.
Contracts That Involve a “Personal” Right
Contracts involving “personal rights” or contracts deemed “personal” by contractual recital or federal law are considered non-assignable or non-transferable unless specific consent is given by the non-assigning party. Generally, “personal” contracts are those that contemplate personal services, skills or performance from the non-assigning party, such as employment, consulting, and partnership agreements. Courts have found that these types of agreements are not freely assignable as a matter of public policy because assigning personal contracts may result in materially adverse consequences (e.g., a material change in duty, risk, or burden) to the non-assigning party. In addition to general contracts for personal services discussed above, courts have also found many types of intellectual property (IP) licenses to be “personal” in nature due to the profound importance of an IP holder’s right to choose who may use the protected IP. Accordingly, non-exclusive IP license rights pertaining to copyright, trademark, and patent licenses are generally considered non-assignable, unless specific consent is given by the non-assigning party. Personal contracts are also treated differently from other types of contracts in the context of M&A events (see the discussion below regarding the impact of M&A deal structures on contract assignment for more detail). Each of the types of “personal” contracts described above should receive heightened contract-by-contract due diligence to ensure that assignment does not violate applicable law.
Courts may also consider the subject matter of the contract and the material risks associated with transferring those rights to the acquiror. For example, where the non-merging entity is a competitor to the acquiring entity, courts may find that given the high risk and burden to the non-merging party, the assignment is ineffective on equitable grounds.
The Effect of the Four Most Common M&A Structures on the Assignment of the Target’s Contracts
The structure employed in a given M&A transaction is critical to determining the treatment of the target company’s various contractual rights. This section will examine the treatment of contractual rights in connection with four common M&A structures: (i) reverse triangular mergers, (ii) forward-triangular mergers, (iii) stock purchases, and (iv) asset purchases. For more information regarding M&A deal structures, please see here and here. While reviewing each of the deal structures that follow, please note that each of the general rules are subject to the exceptions discussed above.
Reverse Triangular Merger
A reverse triangular merger occurs when an acquiror forms a subsidiary and the newly created subsidiary merges with and into the target company. The target survives as a wholly-owned subsidiary of the acquiror following the merger, and continues to own its assets, owe its liabilities, and be party to its contracts.
In a reverse triangular merger, simple anti-assignment clauses generally are not triggered because, as a matter of law, no assignment of the contract has occurred (the target company survives and is the same legal entity as the original contracting party). Accordingly, the contracts of the target remain with the surviving entity without the need to obtain third party consents or take other action. Despite the general rule that no assignment occurs in connection with a reverse triangular merger, thorough contract-by-contract due diligence is still required to identify all contracts that include comprehensive anti-assignment provisions and/or may be deemed to be contracts for personal services (and therefore require consent) under applicable law.
Forward Triangular Merger
In a forward triangular merger, the acquiring entity forms a subsidiary corporation and the target corporation merges directly with and into the newly created subsidiary. As a result, the subsidiary survives the merger. Under this structure, the subsidiary obtains all of the target company’s assets and liabilities by operation of law.
Simple anti-assignment clauses are generally not triggered in a forward triangular merger because the rights are vested, and not assigned, by operation of law. Therefore, the target’s contracts generally transfer automatically to the acquiror without the need to obtain third party consents. However, courts have created considerable ambiguity around the applicability of this general rule in the context of forward triangular mergers. Accordingly, acquirors frequently require target companies to obtain third party consent as a matter of risk allocation and to create certainty that important contracts will remain in place after the merger. As with the above, contract-by-contract due diligence is required to identify contracts that contain anti-assignment language or may be considered to be “personal.”
Direct Stock Purchase
In a direct stock purchase, the acquiror purchases all the outstanding shares of the target directly from its stockholders. Instead of owning certain assets and related liabilities, the acquiror owns the entire selling company. The selling company continues to exist as a separate legal entity and wholly-owned subsidiary of the acquiror (assuming 100% of the outstanding stock is purchased).
In a sale of the target company through a direct stock purchase, the individual assets of the target company (including its material contracts) need not be separately assigned because only the ownership rights of the target are being transferred. Like a reverse triangular merger, a direct stock purchase generally does not trigger a simple anti-assignment provision because the assets are not conveyed to a different entity. Accordingly, the contracts of the selling company remain entirely in place without the need to obtain third party consents. However, contract-by-contract due diligence is required to identify any contracts that contain comprehensive anti-assignment language that would be triggered by the change of control that occurs upon consummation of a stock sale and contracts that may be considered “personal” under applicable law.
The sale of some or all of the assets of a company is one method of transferring part or full ownership in the underlying business. In an asset purchase, the acquiror purchases certain enumerated assets and liabilities of the target in exchange for the cash, the acquiror’s stock, or other consideration.
In an asset purchase transaction, the acquiror is only responsible for the assets and liabilities specifically enumerated in the purchase agreement. All other assets and liabilities remain with the target. Without the protection of a merger statute, the purchaser of contractual assets will need to become a party to the purchased contracts through the general rule of assignability (and the absence of any exceptions). Therefore, if a contract purchased as part of an asset sale contains an anti-assignment provision (whether “simple” or “comprehensive”) or may be considered “personal”, then the target company must obtain the consent of the counter party in order to convey the contract to the acquiror. In the event that neither of the exceptions to the general rule apply, then the contract is generally assignable to the acquiror.
Although contracts are generally freely assignable, in the context of any M&A transaction or other proposed contract assignment, careful consideration should be given to: (1) whether the contract in question includes an anti-assignment provision and, if so, whether the provision is “comprehensive” (i.e., applies to change of control transactions even where, by operation of law, no assignment would be deemed to occur); (2) whether the contract is “personal” in nature; and (3) how the proposed deal structure impacts the treatment of the target’s contractual rights. Given the fact-specific standards for assignment, each of the target’s contracts should be carefully reviewed during the due diligence phase of an M&A transaction to ensure that they are assigned in compliance with applicable law.
Legal Entities: Explained
A legal entity is a recognized party with rights and responsibilities given by legislation.
Legal entities have the following rights and responsibilities to:
Account for themselves to regulators, taxation authorities, and owners according to rules specified in the relevant legislation
Their rights and responsibilities may be enforced through the judicial system. Define a legal entity for each registered company or other entity recognized in law for which you want to record assets, liabilities, expenses and income, pay transaction taxes, or perform intercompany trading.
A legal entity has responsibility for elements of your enterprise for the following reasons:
Facilitating local compliance
Minimizing the enterprise's tax liability
Preparing for acquisitions or disposals of parts of the enterprise
Isolating one area of the business from risks in another area. For example, your enterprise develops property and also leases properties. You could operate the property development business as a separate legal entity to limit risk to your leasing business.
The Role of Your Legal Entities
In configuring your enterprise structure in Oracle Fusion Applications, the contracting party on any transaction is always the legal entity. Individual legal entities:
Own the assets of the enterprise
Record sales and pay taxes on those sales
Make purchases and incur expenses
Perform other transactions
Legal entities must comply with the regulations of jurisdictions, in which they register. Europe now allows for companies to register in one member country and do business in all member countries, and the US allows for companies to register in one state and do business in all states. To support local reporting requirements, legal reporting units are created and registered.
You are required to publish specific and periodic disclosures of your legal entities' operations based on different jurisdictions' requirements. Certain annual or more frequent accounting reports are referred to as statutory or external reporting. These reports must be filed with specified national and regulatory authorities. For example, in the United States (US), your publicly owned entities (corporations) are required to file quarterly and annual reports, as well as other periodic reports, with the Securities and Exchange Commission (SEC), which enforces statutory reporting requirements for public corporations.
Individual entities privately held or held by public companies do not have to file separately. In other countries, your individual entities do have to file in their own name, as well as at the public group level. Disclosure requirements are diverse. For example, your local entities may have to file locally to comply with local regulations in a local currency, as well as being included in your enterprise's reporting requirements in different currency.
A legal entity can represent all or part of your enterprise's management framework. For example, if you operate in a large country such as the United Kingdom or Germany, you might incorporate each division in the country as a separate legal entity. In a smaller country, for example Austria, you might use a single legal entity to host all of your business operations across divisions.
Legal Entity in Oracle Fusion: Points to Consider
Oracle Fusion Applications support the modeling of your legal entities. If you make purchases from or sell to other legal entities, define these other legal entities in your customer and supplier registers. These registers are part of the Oracle Fusion Trading Community Architecture.
When your legal entities are trading with each other, represent them as legal entities and as customers and suppliers in your customer and supplier registers. Use legal entity relationships to determine which transactions are intercompany and require intercompany accounting. Your legal entities can be identified as legal employers and therefore, are available for use in Human Capital Management (HCM) applications.
Several decisions you should consider when you create legal entities.
The importance of using legal entity on transactions
Legal entity and its relationship to business units
Legal entity and its relationship to divisions
Legal entity and its relationship to ledgers
Legal entity and its relationship to balancing segments
Legal entity and its relationship to consolidation rules
Legal entity and its relationship to intercompany transactions
Legal entity and its relationship to worker assignments and legal employer
Legal entity and payroll reporting
Legal reporting units
The Importance of Using Legal Entities on Transactions
All of the assets of the enterprise are owned by individual legal entities. Oracle Fusion Financials allow your users to enter legal entities on transactions that represent a movement in value or obligation.
For example, a sales order creates an obligation on the legal entity that books the order to deliver the goods on the acknowledged date. The creation also creates an obligation on the purchaser to receive and pay for those goods. Under contract law in most countries, damages can be sought for both:
Actual losses, putting the injured party in the same state as if they had not entered into the contract.
What is called loss of bargain, or the profit that would have made on a transaction.
In another example, if you revalued your inventory in a warehouse to account for raw material price increases, the revaluation and revaluation reserves must be reflected in your legal entity's accounts. In Oracle Fusion Applications, your inventory within an inventory organization is managed by a single business unit and belongs to one legal entity.
Legal Entity and Its Relationship to Business Units
A business unit can process transactions on behalf of many legal entities. Frequently, a business unit is part of a single legal entity. In most cases, the legal entity is explicit on your transactions. For example, a payables invoice has an explicit legal entity field. Your accounts payables department can process supplier invoices on behalf of one or many business units.
In some cases, your legal entity is inferred from your business unit that is processing the transaction. For example, Business Unit ACM UK has a default legal entity of InFusion UK Ltd. When a purchase order is placed in ACM UK, the legal entity InFusion UK Ltd is legally obligated to the supplier. Oracle Fusion Procurement, Oracle Fusion Project Portfolio Management, and Oracle Fusion Supply Chain applications rely on deriving the legal entity information from the business unit.
Legal Entity and Its Relationship to Divisions
The division is an area of management responsibility that can correspond to a collection of legal entities. If wanted, you can aggregate the results for your divisions by legal entity or by combining parts of other legal entities. Define date-effective hierarchies for your cost center or legal entity segment in your chart of accounts to facilitate the aggregation and reporting by division. Divisions and legal entities are independent concepts.
Legal Entity and Its Relationship to Ledgers
One of your major responsibilities is to file financial statements for your legal entities. Map legal entities to specific ledgers using the Oracle Fusion General Ledger Accounting Configuration Manager. Within a ledger, you can optionally map a legal entity to one or more balancing segment values.
Legal Entity and Its Relationship to Balancing Segments
Oracle Fusion General Ledger supports up to three balancing segments. Best practices recommend one segment represents your legal entity to ease your requirement to account for your operations to regulatory agencies, tax authorities, and investors. Accounting for your operations means you must produce a balanced trial balance sheet by legal entity. If you account for many legal entities in a single ledger, you must:
Identify the legal entities within the ledger.
Balance transactions that cross legal entity boundaries through intercompany transactions.
Decide which balancing segments correspond to each legal entity and assign them in Oracle Fusion General Ledger Accounting Configuration Manager. Once you assign one balancing segment value in a ledger, then all your balancing segment values must be assigned. This recommended best practice facilitates reporting on assets, liabilities, and income by legal entity.
Represent your legal entities by at least one balancing segment value. You may represent it by two or three balancing segment values if more granular reporting is required. For example, if your legal entity operates in multiple jurisdictions in Europe, you might define balancing segment values and map them to legal reporting units. You can represent a legal entity with more than one balancing segment value. Do not use a single balancing segment value to represent more than one legal entity.
In Oracle Fusion General Ledger, there are three balancing segments. You can use separate balancing segments to represent your divisions or strategic business units to enable management reporting at the balance sheet level for each. This solution is used to empower your business unit and divisional managers to track and assume responsibility for their asset utilization or return on investment. Using multiple balancing segments is also useful when you know at the time of implementation that you are disposing of a part of a legal entity and want to isolate the assets and liabilities for that entity.
Implementing multiple balancing segments requires every journal entry that is not balanced by division or business unit, to generate balancing lines. You cannot change to multiple balancing segments after you begin using the ledger because your historical data is not balanced by the new balancing segments. Restating historical data must be done at that point.
If your enterprise regularly spins off businesses or holds managers accountable for utilization of assets, identify the business with a balancing segment value. If you account for each legal entity in a separate ledger, no requirement exists to identify the legal entity with a balancing segment value.
While transactions that cross balancing segments don't necessarily cross legal entity boundaries, all transactions that cross legal entity boundaries must cross balancing segments. If you make an acquisition or are preparing to dispose of a portion of your enterprise, you may want to account for that part of the enterprise in its own balancing segment even if the portion is not a separate legal entity. If you do not map legal entities sharing the same ledger to balancing segments, you cannot distinguish them using intercompany functionality or track individual equity.
Legal Entity and Its Relationship to Consolidation Rules
In Oracle Fusion Applications you can map legal entities to balancing segments and then define consolidation rules using your balancing segments. You are creating a relationship between the definition of your legal entities and their role in your consolidation.
Legal Entity and Its Relationship to Intercompany Transactions
Use Oracle Fusion Intercompany feature to create intercompany entries automatically across your balancing segments. Intercompany processing updates legal ownership within the enterprise's groups of legal entities. Invoices or journals are created as needed. To limit the number of trading pairs for your enterprise, set up intercompany organizations and assign then to your authorized legal entities. Define processing options and intercompany accounts to use when creating intercompany transactions and to assist in consolidation elimination entries. These accounts are derived and automatically entered on your intercompany transactions based on legal entities assigned to your intercompany organizations.
Intracompany trading, in which legal ownership isn't changed but other organizational responsibilities are, is also supported. For example, you can track assets and liabilities that move between your departments within your legal entities by creating departmental level intercompany organizations.
Tip: In the Oracle Fusion Supply Chain applications, you can model intercompany relationships using business units, from which legal entities are derived.
Legal Entity and Its Relationship to Worker Assignments and Legal Employer
Legal entities that employ people are called legal employers in the Oracle Fusion Legal Entity Configurator. You must enter legal employers on worker assignments in Oracle Fusion HCM.
Legal Entity and Payroll Reporting
Your legal entities are required to pay payroll tax and social insurance such as social security on your payroll. In Oracle Fusion Applications, you can register payroll statutory units to pay and report on payroll tax and social insurance for your legal entities. As the legal employer, you might be required to pay payroll tax, not only at the national level, but also at the local level. You meet this obligation by establishing your legal entity as a place of work within the jurisdiction of a local authority. Set up legal reporting units to represent the part of your enterprise with a specific legal reporting obligation. You can also mark these legal reporting units as tax reporting units, if the legal entity must pay taxes as a result of establishing a place of business within the jurisdiction.
Creating Legal Entities in the Enterprise Structures Configurator: Points to Consider
Use the Enterprise Structures Configurator (ESC), to create legal entities for your enterprise automatically, based on the countries in which divisions of your business operate, or you can upload a list of legal entities from a spreadsheet.
Automatically Creating Legal Entities
If you are not certain of the number of legal entities that you need, you can create them automatically. To use this option, you first identify all of the countries in which your enterprise operates. The application opens the Map Divisions by Country page, which contains a matrix of the countries that you identified, your enterprise, and the divisions that you created. You select the check boxes where your enterprise and divisions intersect with the countries to identify the legal entities that you want the application to create. The enterprise is included for situations where your enterprise operates in a country, acts on behalf of several divisions within the enterprise, and is a legal employer in a country. If you select the enterprise for a country, the application creates a country holding company.
The application automatically creates the legal entities that you select, and identifies them as payroll statutory units and legal employers. For each country that you indicated that your enterprise operates in, and for each country that you created a location for, the application also automatically creates a legislative data group.
Any legal entities that you create automatically cannot be deleted from the Create Legal Entities page within the Enterprise Structures Configurator. You must return to the Map Divisions by Country page and deselect the legal entities that you no longer want.
Example: Creating Legal Entities Automatically
InFusion Corporation is using the ESC to set up its enterprise structure. The corporation has identified two divisions, one for Lighting, and one for Security. The Lighting division operates in Japan and the US, and the Security division operates in the UK and India.
This figure illustrates InFusion Corporation's enterprise structure.
This table represents the selections that InFusion Corporation makes when specifying which legal entities to create on the Map Divisions by Country page.
Based on the selections made in the preceding table, the ESC creates the following four legal entities:
InFusion Lighting Japan LE
InFusion Lighting US LE
InFusion Security UK LE
InFusion Security India LE
Creating Legal Entities Using a Spreadsheet
If you have a list of legal entities already defined for your enterprise, you can upload them from a spreadsheet. To use this option, you first download a spreadsheet template, then add your legal entity information to the spreadsheet, and then upload directly to your enterprise configuration. You can export and import the spreadsheet multiple times to accommodate revisions.
Creating Legal Entities, Registrations, and Reporting Units: Examples
Define a legal entity for each registered company or other entity recognized in law for which you want to record assets, liabilities, and income, pay transaction taxes, or perform intercompany trading.
Create a legal entity by following these steps:
Navigator > Setup and Maintenance > Manage Legal Entity > Go to Task.
Accept the default Country, United States.
Enter Name, InFusion USA West.
Enter Legal Entity Identifier, US0033.
Optionally enter Start Date. When the start date is blank the legal entity is effective from the creation date.
Optionally enter an End Date.
Optionally, if your legal entity should be registered to report payroll tax and social insurance, select the Payroll statutory unit check box.
Optionally, if your legal entity has employees, select the Legal employer check box.
Optionally, if this legal entity is not a payroll statutory unit, select an existing payroll statutory unit to report payroll tax and social instance on behalf of this legal entity.
Enter the Registration Information
Accept the default Identifying Jurisdiction, United States Income Tax.
Search for and select a Legal Address, 500 Oracle Parkway, Redwood Shores, CA 94065.
The legal address must have been entered previously using the Manage Legal Address task.
Optionally enter a Place of Registration.
Enter the EIN or TIN.
Enter the Legal Reporting Unit Registration Number.
Save and Close.
Navigator > Setup and Maintenance > Define Legal Entries > Manage Legal Entity > Select to set scope.
Select the Manage Legal Entity.
In the *Legal Entity list, select Select and Add.
Click Apply and Go to Task.
Select your legal entity.
Save and Close.
This sets the scope for your task list to the selected legal entity.
Save and Close.
Legal Entity Registrations
A legal entity registration with the same name as that of the legal entity is created by default. To verify this, locate the Manage Legal Entity Registrations task and then select Go to Task. To create another registration for the legal entity follow these steps:
Navigator > Setup and Maintenance > Manage Legal Entity Registrations: Verify that the Legal Entity scope value is set correctly.
Go to Task.
Enter Registered Address.
Enter Registered Name.
Optionally enter Alternate Name, Registration Number, Place of Registration, Issuing Legal Authority, and Issuing Legal Authority Address, Start Date, and End Date.
Save and Close.
Legal Reporting Unit
When a legal entity is created, a legal reporting unit with the same name as that of the entity is also automatically created. To create more legal reporting units or modify the settings follow these steps:
Navigator > Setup and Maintenance > Define Legal Reporting Unit. > Manage Legal Reporting Unit. Verify that the Legal Entity scope value is set correctly.
Go to Task
Enter Territory, United States.
Optionally enter a Start Date.
Enter Registration Information.
Search for and select Jurisdiction.
Enter Main Legal Reporting Unit information.
Select the value Yes or No for the Main Legal Reporting Unit. Set value to yes only if you are creating a new main (primary) legal reporting unit.
Enter the Main Effective Start Date, 1/1/11.
Save and Close.
Manage Legal Entity HCM Information
HCM Organization Models: Examples
These examples illustrate different models for human capital management (HCM) organizations that include a legislative data group (LDG). This example includes LDGs, which aren't an organization classification, to show how to partition payroll data by associating them with a payroll statutory unit.
This example illustrates a simple configuration that does not include any tax reporting units.
Note the following:
The legal employer and payroll statutory units are the same, sharing the same boundaries.
Reporting can only be done at a single level. Countries such as Saudi Arabia and the United Arab Emirates (UAE) might use this type of model, as these countries report at the legal entity level.
This figure illustrates a simple configuration where the enterprise has only one legal entity, which is both a payroll statutory unit and a legal employer.
Multiple Legal Employers and Tax Reporting Units
This example illustrates a more complex configuration. In this enterprise, you define one legal entity, InFusion US as a payroll statutory unit with two separate legal entities, which are also legal employers. This model shows multiple legal employers that are associated with a single payroll statutory unit. Tax reporting units are always associated with a specific legal employer (or employers) through the payroll statutory unit.
The implication is that payroll statutory reporting boundaries vary from human resources (HR) management, and you can categorize the balances separately by one of the following:
Payroll statutory unit
Tax reporting unit
This configuration is based on tax filing requirements, as some tax-related payments and reports are associated with a higher level than employers. An example of a country that might use this model is the US.
This figure illustrates an enterprise that has one payroll statutory unit and multiple legal employers and tax reporting units.
One Payroll Statutory Unit and Two Tax Reporting Units
This model makes no distinction between a legal employer and a payroll statutory unit. You define tax reporting units as subsidiaries to the legal entity.
In this enterprise, legal entity is the highest level of aggregation for payroll calculations and reporting. Statutory reporting boundaries are the same for both payroll and HR management. An example of a country that might use this model is France.
This figure illustrates an example of an organization with one legal entity. The legal entity is both a legal employer and a payroll statutory unit and that has two tax reporting units.
One Payroll Statutory Unit with Several Tax Reporting Units
In this model, the enterprise has one legal entity. Legal employers and tax reporting units are independent from each other within a payroll statutory unit, because there is no relationship from a legal perspective. Therefore, you can run reporting on both entities independently.
Using this model, you wouldn't typically:
Report on tax reporting unit balances within a legal employer
Categorize balances by either or both organizations, as required
An example of a country that might use this model is India.
This figure illustrates an enterprise with one legal entity that is a payroll statutory unit and a legal employer. The tax reporting units are independent from the legal employer.
Multiple Payroll Statutory Units with Several Tax Reporting Units
In this model, the enterprise has two legal entities. The legal employers and tax reporting units are independent from each other within a payroll statutory unit, because there is no relationship from a legal perspective. Therefore, you can run reporting on both entities independently.
Using this model, you wouldn't typically:
Report on tax reporting unit balances within a legal employer
Categorize balances by either or both organizations, as required
An example of a country that might use this model is the United Kingdom (UK).
This figure illustrates an enterprise with two legal entities, and legal employers and tax reporting units are independent from each other.
Payroll Statutory Units, Legal Employers, and Tax Reporting Units: How They Work Together
When you set up legal entities, you can identify them as legal employers and payroll statutory units, which makes them available for use in Oracle Fusion Human Capital Management (HCM). Depending on how your organization is structured, you may have only one legal entity that is also a payroll statutory unit and a legal employer, or you may have multiple legal entities, payroll statutory units, and legal employers.
Legal Employers and Payroll Statutory Unit
Payroll statutory units enable you to group legal employers so that you can perform statutory calculations at a higher level, such as for court orders or for United Kingdom (UK) statutory sick pay. In some cases, a legal employer is also a payroll statutory unit. However, your organization may have several legal employers under one payroll statutory unit. A legal employer can belong to only one payroll statutory unit.
Payroll Statutory Units and Tax Reporting Units
Payroll statutory units and tax reporting units have a parent-child relationship, with the payroll statutory unit being the parent.
Tax Reporting Units and Legal Employers
Tax reporting units are indirectly associated with a legal employer through the payroll statutory unit. One or more tax reporting units can be used by a single legal employer, and a tax reporting unit can be used by one or more legal employers. For example, assume that a single tax reporting unit is linked to a payroll statutory unit. Assume also that two legal employers are associated with this payroll statutory unit. In this example, both legal employers are associated with the single tax reporting unit.
Use the Manage Legal Reporting Unit HCM Information task to designate an existing legal reporting unit as a tax reporting unit. If you create a new legal reporting unit that belongs to a legal employer (that is not also a payroll statutory unit), you select a parent payroll statutory unit and then, when you run the Manage Legal Reporting Unit HCM Information task, you designate it as a tax reporting unit and select the legal employer.
FAQs for Manage Legal Entity HCM Information
What's a legal employer?
A legal employer is a legal entity that employs workers. You define a legal entity as a legal employer in the Oracle Fusion Legal Entity Configurator.
The legal employer is captured at the work relationship level, and all assignments within that relationship are automatically with that legal employer. Legal employer information for worker assignments is also used for reporting purposes.
What's a payroll statutory unit?
Payroll statutory units are legal entities that are responsible for paying workers, including the payment of payroll tax and social insurance. A payroll statutory unit can pay and report on payroll tax and social insurance on behalf of one or many legal entities, depending on the structure of your enterprise. For example, if you are a multinational, multiple company enterprise, then you register a payroll statutory unit in each country where you employ and pay people. You can optionally register a consolidated payroll statutory unit to pay and report on workers across multiple legal employers within the same country. You associate a legislative data group with a payroll statutory unit to provide the correct payroll information for workers.
Manage Legal Entity Tax Profile
Party Tax Profiles: Explained
A tax profile is the body of information that relates to a party's transaction tax activities. A tax profile can include main and default information, tax registration, tax exemptions, party fiscal classifications, tax reporting codes, configuration options, and service subscriptions.
Set up tax profiles for the following parties involved in your transactions:
Set up tax profiles for your first-party legal entities, legal reporting units, and business units.
First-party legal entities identify your organization to the relevant legal authorities, for example, a national or international headquarters. Legal entities let you model your external relationships to legal authorities more accurately. The relationships between first-party legal entities and the relevant tax authorities normally control the setup of the transaction taxes required by your business. Under most circumstances, the tax setup is used and maintained based on the configuration of the legal entity. Enter the default information, party fiscal classifications, tax reporting codes, and configuration options for your legal entities. You can also specify if you're using the tax services of an external service provider for tax calculation.
First-party legal reporting units identify each office, service center, warehouse, and any other location within the organization with a tax requirement. A legal reporting unit tax profile is automatically created for the headquarter legal entity. Set up additional legal reporting unit tax profiles for those needed for tax purposes. For legal reporting units, enter the default information, tax registrations, party fiscal classifications, and tax reporting codes. Also, define tax reporting details for your VAT and global tax reporting needs for tax registrations of tax regimes that allow this setup.
Business units organize your company data according to your internal accounting, financial monitoring, and reporting requirements. To help you manage the tax needs of your business units, you can use the business unit tax profile in either of two ways:
Indicate that business unit tax setup is used and maintained based on the configuration of the associated legal entity at transaction time. The tax setup of the associated legal entity setup is either specific to the legal entity or shared across legal entities using the Global Configuration Owner setup.
Indicate that tax setup is used and maintained by a specific business unit. Create configuration options for the business unit to indicate that the subscribed tax content is used for the transactions created for the business unit.
For business units that maintain their own setup, enter the default information, tax reporting codes, configuration options, and service providers as required.
Set up third-party tax profiles for parties with the usage of customer, supplier, and their sites. Enter the default information, tax registrations, party fiscal classifications, and reporting codes required for your third parties or third-party sites. You can set up tax exemptions for your customers and customer sites.
Banks are also considered third parties. When a bank is created, the tax registration number specified on the bank record is added to the party tax profile record in Oracle Fusion Tax. You can't modify the party tax profile for a bank as it's view only. You can only modify the bank record.
Note: You don't need to set up party tax profiles for third parties. Taxes are still calculated on transactions for third parties that don't have tax profiles.
Set up a tax authority party tax profile using the Legal Authorities setup task. The tax authority party tax profile identifies a tax authority party as a collecting authority or a reporting authority or both. A collecting tax authority manages the administration of tax remittances. A reporting tax authority receives and processes all company transaction tax reports.
The collecting and reporting tax authorities appear in the corresponding list of values on all applicable Oracle Fusion Tax pages. All tax authorities are available in the list of values as an issuing tax authority.
Specifying First-Party Tax Profile Options: Points to Consider
Set up first-party tax profiles for all legal entities, legal reporting units, and business units in your organization that have a transaction tax requirements. How you set up your first parties can impact the tax calculation on your transactions.
The first-party tax profile consists of:
Defaults and controls: Applicable to legal entities and legal reporting units. Business units that use their own tax setup don't have defaults and controls.
Tax registrations: Applicable to legal reporting units.
Party fiscal classifications: Applicable to legal entities and legal reporting units.
Tax reporting codes: Applicable to legal entities, legal reporting units, and business units who don't use the tax setup of the legal entity.
Configuration options: Applicable to legal entities and business units who don't use the tax setup of the legal entity.
Service subscriptions: Applicable to legal entities and business units who don't use the tax setup of the legal entity.
Defaults and Controls
The following table describes the defaults and controls available at the first-party tax profile level:
Set as self-assessment (reverse charge)
Automatically self-assess taxes on purchases.
Perform rounding operations on the:
The rule that defines how the rounding must be performed on a value involved in a taxable transaction. For example, up to the next highest value, down to the next lowest value, or nearest.
Note: If you defined a rounding precedence hierarchy in the configuration owner tax option settings for the combination of configuration owner and event class, Oracle Fusion Tax considers the rounding details in the applicable tax profile.
Set Invoice Values as Tax Inclusive
This first party intends to send or receive invoices with invoice line amount inclusive of the tax amount.
Note: This option overrides the tax inclusive handling setting at the tax level, but not at the tax rate level.
Set up a separate tax registration to represent each distinct registration requirement for a first-party legal reporting unit. Oracle Fusion Tax uses tax registrations in tax determination and tax reporting. If your first party has more than one tax registration under the same tax regime, then the application considers the tax registration in the order: tax jurisdiction; tax; tax regime.
You must enable the Use tax reporting configuration option on the first-party tax regime to allow entry of global tax reporting configuration details during tax registration setup for legal reporting units for these tax regimes.
Party Fiscal Classifications
If applicable, associate first-party fiscal classification codes with this party. The party fiscal classification codes you enter become part of tax determination for invoices associated with this party. Specify start and end dates to control when these fiscal classifications are applicable for this party and transaction.
For legal entities, you can view the associated legal classifications that were assigned to the tax regime defined for this first party. The legal classifications are used in the tax determination process, similar to the party fiscal classifications.
Tax Reporting Codes
Set up tax reporting types to capture additional tax information on transactions for your tax reports for your first parties. Depending on the tax reporting type code, you either enter or select a tax reporting code for this party. Specify start and end dates to control when these tax reporting codes are applicable.
The legal entities and business units in your organization are each subject to specific sets of tax regulations as designated by the tax authorities where you do business. Use configuration options to associate legal entities and business units with their applicable tax regimes. You can set up tax configuration options when you create a tax regime or when you create a party tax profile. Both setup flows display and maintain the same party and tax regime definitions.
Oracle Fusion Tax lets you use the tax services of external service providers for tax calculation of US Sales and Use Tax on Receivables transactions. The setup for provider services is called a service subscription. A service subscription applies to the transactions of one configuration option setup for a combination of tax regime and legal entity or business unit. Set up service subscriptions when you create a tax regime or when you create a party tax profile for a first-party legal entity or business unit.
FAQs for Manage Legal Entity Tax Profile
When does a party tax profile get created for a legal entity?
The legal entity party tax profile is automatically created when a legal entity record is created.
When a legal entity is created through a back-end process, a legal entity party tax profile is created, when you:
Save a tax regime to which the legal tax entity subscribes.
Save the configuration owner tax option that are defined for the legal entity.