In the field of tax disclosure, corporate financial executives are under increasing pressure. They must carefully balance meeting regulatory disclosure requirements against avoiding excessive public disclosure of financial information—the latter could lead to unintended consequences, such as providing opportunities for competitors or attracting close scrutiny from regulators.

Tax disclosure requirements are also an increasingly serious challenge for many companies. For example, rules issued by the U.S. Financial Accounting Standards Board have sparked strong opposition. These rules require companies to disclose more detailed information in their income tax reports, such as identifyingcountries or states that receive more than 5% of their total tax payments.

However, for financial executives at many public companies, part of their role is to provide information and communication to analysts so that analysts can explain the company's business model to investors and lenders. If done well, this can open doors to financing transactions and attract more investors.

Based on this, a chief financial officer (CFO) who prudently shares at least some specific figures in financial reports will help most clearly depict their organization's tax position—this is according to a recent study by Carly Burd, an assistant professor of accounting at North Carolina State University's Poole College of ManagementCarly Burd, assistant professor of accounting, concluded in a recent study.

Burd found that providing more detailed numerical data helps analysts understand the situation more effectively than relying more on narrative text. The study was published earlier this month.

"When companies report more granular numerical tax details, especially in footnotes, analysts are better able to implicitly predict tax outcomes. For companies with complex tax situations, this numerical detail is most valuable," Burd said in an email to CFO Dive on Friday. "Narrative disclosure also helps, but it works differently than numbers."

According to a press release from the research platform Newswise, this finding highlights an exception to previous research—which suggested that number-dense financial statements could create a "confusing picture" for investors.

"Previous research found that when companies include more numbers in their annual financial statements, the statements become overly complex and difficult for investors to process," Burd said in a statement in the press release. "I wanted to focus specifically on numbers related to the various transactions a company engages in that could affect tax outcomes. When I looked only at those tax numbers, I found that these numbers actually help improve investor clarity."

In her research, Burd used eXtensible Business Reporting Language (a machine-readable language that can tag numerical items in financial statements) to analyze tax numbers from 7,944 annual reports of 2,099 companies between 2012 and 2019.

The study also found that this transparency does come with risks: according to the press release, statements containing more tax numbers were more likely to be downloaded by employees of the U.S. Internal Revenue Service.

However, the study suggests that stricter IRS scrutiny may prompt companies to provide additional data, and such scrutiny may precede companies adopting more transparent disclosure practices.

"Companies subject to stricter IRS scrutiny may be forced to provide more complete numerical tax details... Therefore, the findings should be interpreted as correlational rather than causal," the report noted.