The emerging challenge of fronting in the Tourism Industry

As if the rise of regional tourism and undercutting is not bad enough, Bhutan’s tourism Industry is seeing the rise of a new kind of challenge which is fronting in the tourism Industry -where foreign tour companies use Bhutanese tour licenses to run their business in Bhutan.

The result is money either not entering the country at all or going out later and in the process local tour operators and the country loses out.

These fronting agencies could also be avoiding taxes in Bhutan.

The National Council (NC) itself is doing a study into fronting in Bhutan and one of the areas of study in this report is the tourism industry.

It has been found that fronting does exist in the Tourism Industry but is more than just the giving of a license to a foreign company.

Apart from the misuse of licenses, large foreign tour companies hire Bhutanese ground handlers who pose as tour companies but essentially only handle the guests while the real money is made by the foreign tour company.

Another area is where again large foreign tour companies send guests to tour companies in Bhutan where the Bhutanese tour company only provides some services though the tourists come under their name. This area though is a little greyer area than the above.

The Guides Association of Bhutan (GAB) Chairman Garab Dorji said that there is fronting in Bhutan’s tourism industry with foreign tour operators misusing Bhutanese tour licenses.

He said he has heard of tour companies in Bhutan where a manager is appointed who can be foreign or local and they only get a salary from a foreign tour company but they pretend to run a Bhutanese tour company while being an effective branch of that foreign tour company.

Garab said that for tariff paying tourists while the USD 180 for off season and USD 225 for season amount (the figure is minus 10 percent commission allowed by TCB) is deposited with TCB, the actual money which is higher charges at more expensive hotels, additional guide charges and other charges do not even enter the country.

He said even air tickets are booked by these foreign tour companies. Only the minimal amount is sent to Bhutan and the actual profit or money does not even enter Bhutan. Garab said that an actual tourist could be paying thousands of dollars for the foreign tour companies package but only a much lesser amount comes to Bhutan.

The GAB Chairman said that one way to catch such fronting companies and also gather more revenue for the state is to improve the taxation system.

He said that these foreign tour companies apart from getting a local license will train the local staff and then start sending tourists to Bhutan.

Garab said that Bhutan could head the Nepal way where major tour operations are run by the Chinese and Indians along with ownership of hotels and tourism properties.

During discussions with tour operators and hotels it was found that the rampant practice of undercutting in fact gave rise to regional tourism.

The concern in the tourism industry is that while fronting may not yet be a large scale phenomenon, it has the potential to overtake the local industry and tour operators.

They concede that even with undercutting Bhutanese tour companies make money but if large foreign tour operators come in directly then even that money is gone.

Tour Operators are also concerned with the emergence of fronting in the hotel industry where they allege that some hotels in Bhutan are already owned by Indians across the border using the guise of Bhutanese names. These hotels then cater to regional tourists.

Fronting in the tourism industry could also be making the regional tourism boom problem worse.

The owner of Wind Horse tours and also the vice chairman of Association of Bhutanese Tour Operators (ABTO) Rinzin Jamtsho said that he has heard rumors of fronting. He said he is concerned about how tour agents across the border run tour operations in Bhutan by just hiring someone in Bhutan to do the paperwork and get permits. He said he is concerned that regional tours are being run in this manner.

He said this leads to revenue leakage and the money stays outside. Rinzin said that in this case it is difficult to pin-point which regulations are being violated.

Etho-Metho’s Tandin Sangay Wangchuk said that the only way to catch any fronting tour companies in Bhutan is by strengthening the tax collection system for the tourism industry.

He said this would not only curb any fronting but it would also ensure that proper taxes are paid by all and the government does not lose.

He gave the example of the TCB’s Tashel system which only computes hotel charges for three star hotels but not above it.

Sangay said that the foreign or even domestic tour companies could have earned far more from a tourist and should pay tax on it but given that only some expenditure heads are shown a lot of tax revenue is lost.

He said that the tax system should ask tour companies to feed in more expense heads so that a real picture can emerge of how much money has been made from a tourist.

He said this system can also help to tackle undercutting in the industry.

The DG of Tourism Council of Bhutan Dorji Dhradhul said that that fronting in the tourism industry will have the same impact it has in the other sectors which is trade and manufacturing.

He said that Bhutan needs to prepare for this and there needs to be sensitization on the issue.

He said that the TCB will be looking into this issue as well.