UTF8 and AL32UTF8 are encodings of the Unicode character set and include all the characters in all modern languages. UTF8 and AL32UTF8 allow Oracle Applications to be run from one database instance using any combination of supported languages. The advantage of AL32UTF8 over UTF8 is in the handling of supplementary characters, which are increasingly used in certain languages. AL16UTF16 is the current default database character set for Oracle databases 10g and 11g and Oracle E-Business Suite R12.

If you happen to create a fresh Apps Production instance, be sure to select the characterset as AL16UTF16, if all the clients and servers connecting to your instance are 9i and above. This is because 8i databases have trouble connecting to AL32UTF8 databases as per metalink note 237593.1

Caution:

AL32UTF8 is the Oracle Database character set that is appropriate for XMLType data. It is equivalent to the IANA registered standard UTF-8 encoding, which supports all valid XML characters.

Do not confuse Oracle Database database character set UTF8 (no hyphen) with database character set AL32UTF8 or with character encoding UTF-8. Database character set UTF8 has been superseded by AL32UTF8. Do not use UTF8 for XML data. UTF8 supports only Unicode version 3.1 and earlier; it does not support all valid XML characters. AL32UTF8 has no such limitation.

Using database character set UTF8 for XML data could cause a fatal error or affect security negatively. If a character that is not supported by the database character set appears in an input-document element name, a replacement character (usually a question mark) is substituted for it. This will terminate parsing and raise an exception.