Yue “Daisy” Dai, a professor at the Shanghai University of Finance and Economics, describes life in China during the coronavirus outbreak and the tax policy measures the country is using to combat the pathogen.
The interview has been edited for length and clarity.
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: the response to coronavirus. Whether or not it officially reaches full pandemic status, the coronavirus is having a significant economic impact, from canceled flights and quarantined cruise ships to idled factories. How is China, the country that is hardest hit, using tax policy to cope with the outbreak?
Joining me now by phone is Daisy Dai, an assistant law professor at the Shanghai University of Finance and Economics. Daisy is also a senior academic visitor with the University of Oxford Faculty of Law. She recently wrote about this topic for Tax Notes. Daisy, welcome to the podcast.
Daisy Dai: Thank you so much, Dave. It is great to be here.
David Stewart: Why don't we start with an update on where things are with the virus as of the day we're recording this. It's currently February 26, 2020. Things are moving kind of fast. But where are things now?
Daisy Dai: Right now there are five new cases confirmed outside of Hubei province and 400 new cases confirmed in Hubei. The aggregate number of confirmed cases in China is around 78,000 and more than 25,000 cases have been cured and discharged from the hospital. It is clear that most of the new cases in China happened in the Hubei province.
Since January 23, Hubei has been locked down to quarantine the coronavirus outbreak. There has been some real decline in China due to the quarantine requirements. Wuhan, which has a population of over 11 million, has a key role in domestic transport in central China. The whole of Hubei province has been locked down and Wuhan cannot get anywhere else in China. We hope the quarantine will continue to be effective like it's been during the past month.
David Stewart: Is it just the one region that's being quarantined or are there other measures being taken elsewhere in China?
Daisy Dai: Actually most places in China have been under quarantine during the past month. I do think I'm living in a very interesting time. The Lunar New Year is considered the biggest time of the year for families to get together and celebrate. But this year, due to the outbreak, most places were locked down in China.
I was actually traveling with my family in Europe during the Lunar New Year and our return flight was canceled in Europe. We had to reroute, and we went through Moscow and then flew to Shanghai. When we arrived in Shanghai, we had to stay home for 14 days, which is the quarantine requirement.
Everyone in this country is making sacrifices to stop the spread of coronavirus. The message we got from the government is that the best thing we could do at this moment for GDP is to stay home.
Even today, a number of public places like grocery stores and coffee shops check visitors' temperature at the entrance. As I personally experienced in the past two weeks, each household only got one ticket to go out for grocery shopping. This is how the quarantine has taken place in most places in China. The university where I teach is still shut down. Students started online classes last week, but we're still unsure when school will start. Maybe in late March, but we don't know yet.
David Stewart: Is it sort of eerie? There's just no one outside these days?
Daisy Dai: I'd say during the first week of February, the whole country was kind of empty because people were staying home. But it's getting much better now because the government sees the urgency to resume work, so most major traffic has resumed in the past week.
David Stewart: What sort of tax measures is the government using as it's trying to combat the outbreak?
Daisy Dai: The government has taken several tax measures to help combat the outbreak. For example, all the medical workers who are fighting the coronavirus on the front line in Hubei will receive their salaries tax-free and their subsidies tax-free. After the coronavirus outbreak, they will get paid vacation.
The second one is the import of medicines, medical supplies, and other vehicles used to combat the pathogen are all tax-free. Customs is processing all these imports as a priority.
The third one is donation tax deductions. Beforehand, individuals, taxpayers, or corporate taxpayers could not deduct a full amount for donations. But this time, they can claim a full tax deduction for cash and goods donated to defeat the coronavirus. It doesn't have to be donations made for the Red Cross specifically. They can take full tax deductions for any donations made directly to the designated hospitals and other equivalent NGOs.
The companies who produce key supplies for prevention can take immediate deductions of all qualifying equipment costs. Without this particular regulatory response, they could only depreciate these key supplies over the new supplies. Manufacturers who are producing key supplies and investing in R&D can take a super deduction, which is simplified deductions of qualified R&D expenses. On top of that, those high-tech enterprises can still get 15 percent preferential corporate income tax rates.
I know that the U.S. doesn't have VAT, but China imposes VAT. In Wuhan, taxpayers will be exempt from VAT and other taxes if the medical supplies they produced or purchased were donated towards combating the coronavirus.
A lot of enterprises producing masks will get qualifying financial subsidies from the government. Those financial subsidies are not subject to corporate income tax.
David Stewart: You mentioned that the government had said something about staying home was the best thing you could do for GDP. What sort of economic effects is China experiencing from this outbreak and the quarantines?
Daisy Dai: A significant number of factories had shut down during the coronavirus outbreak in the past month. For these factories in particular, they suffered some fair economic losses, especially those small and medium-size enterprises. They couldn't afford to pay employee wages and rent at the same time they had to remain shut down.
The shutdown has also impacted global supply chains. In a survey done by the American Chamber of Commerce in Shanghai, they found 48 percent of companies report their global operations are already impacted by the shutdown. These are American companies with manufacturing operations in the Shanghai region. The shutdown has had substantial impact on not only global supply chains, but also in China's domestic SMEs.
Right now there are several obstacles to resuming business. The first one is the shortage of workers because companies in major cities like Shanghai and Beijing rely on migrant workers to resume business. These migrant workers are currently stopped in villages or other distant cities. Since February 16, there have been hundreds of trains transporting the migrant workers to major cities, including Shanghai, Guangdong in the south, and to the east coast.
The second obstacle, according to the survey and other sources, is the shortage of masks. According to the American Chamber of Commerce survey, 38 percent of companies said they did not have sufficient masks or other safety supplies to protect workers. Local regulations in Shanghai require all of these companies to provide masks to protect workers.
The third issue is logistical. Traffic was shut down during the first and the second week of February so people could not travel. They had to reopen the main traffic in mid-February to transport supplies and workers involved in combating the coronavirus outbreak. Next week, the logistics will become less of a concern, but right now it is still a big concern for many.
The last one is the increased compliance regulations for companies to resume business. In Shanghai and the Guangdong province, these companies must file several forms to obtain the local government's approval to reopen. These requirements include checking their workers' recent travel records to see whether the workers have traveled to Hubei. Before last week, a lot of places were still imposing a 14-day quarantine requirement. But now about eight provinces have lowered that quarantine requirement, so workers do not have to stay home for 14 days.
David Stewart: What sort of tax measures is the government taking to mitigate the economic effects of this outbreak?
Daisy Dai: As we have seen, there are potential economic losses at this moment. A lot of individual and corporate taxpayers were not able to submit their tax filings, which were supposed to be due in the first week of February. The monthly tax filing deadline has been extended to the end of February.
For tax bills due across the whole country, taxpayers are encouraged to use the e-filing systems and digital invoices. The purpose is to minimize any human-to-human contact, which I think will be very helpful.
The second measure is the VAT exemption and the exemption from all the other taxes. Businesses in public transportation, transportation for emergency supplies, and other essential medical services are right now exempt from VAT. This exemption is supposed to last until May, and in the Hubei province, they will probably extend it to July. But we don't know that definitively yet.
The businesses that are severely affected can carry forward all the losses occurred in 2020 for an additional three years. It used to be five years, and with this additional three years, it is eight years in total for them to carry forward the loss.
Of course, the central government provides a lot of Social Security deferral payment and subsidies. Before these deferrals and subsidies, the SMEs had incurred a lot of huge economic loss because they have to pay the workers a substantial amount of Social Security payments on top of their salary. The central government responded by deferring payments and they also subsidized the SMEs' rates and the Social Security payments.
David Stewart: Do you expect any additional measures from the government in the relatively near future?
Daisy Dai: Yes, it is very likely. The central government probably will announce more tax measures in March when business is fully resumed. At this point, only 70 percent have resumed work.
We also can expect more of the tax relief at the local government level because in China the local government has a lot of discretion to give tax relief for business, especially for business that is encouraged by the local government.
David Stewart: Daisy, thank you very much for joining me today.
Daisy Dai: Thank you Dave. It's my honor to be here today.
David Stewart: I hope things go back to normal for you pretty soon.
Daisy Dai: Thank you, David. I hope so too, and I'm so sorry to see that there are more cases in South Korea, Japan, and Italy.