The ad valorem tax is an imposition in the form of a percentage of the transaction value of a good .
This tax is applied to the value of the good, whether this furniture or real estate. So it is not like other taxes in which it is applied based on a rate on the amount of the good. This characteristic exposes it as a flexible tax, since it is related to the assessed value of the good.
The ad valorem tax form, in addition to being applied to the ownership of movable and immovable property, also applies to the sale of goods and services, being applied at the point of sale.
It is worth mentioning that this type of tax is preferred by the administrative authorities of the different countries of the world. It is estimated that more than 90% of taxes are ad valorem.
Extension of ad valorem taxes
The ad valorem rate is of great application in international trade . In such a way that three types of tariffs are distinguished, that is to say, taxes applied exclusively to imported products.
- Ad valorem tariff.
- Specific tariff
The ad valorem tariff is applied to the value of the imported product once it includes cost, freight and insurance. That is, it comes to be applied to the CIF value. So, if a good has a 7% ad valorem tariff, the importation of merchandise of this type with a value of 500,000 euros would pay a tariff: 500,000 x 7% = 35,000 euros.
The specific rate is applied as a fixed amount per unit or weight to a good. Thus, for example, a flat rate of 0.5 euros per unit is applied to shirts imported from a certain country.
By combining an ad valorem tariff and a specific tariff, a type of mixed tariff is created. That is to say, a percentage representing the ad valorem is applied to the product, on the one hand. And, on the other, a fixed rate that represents the specific tariff.
Example of ad valorem tax
This means that if a product has an ad valorem tariff imposition of 5% and also has a specific tax of 16 euros per ton. We will have that, for an import of 2 tons worth 700.00 euros, customs taxes would be paid; 700,000 x 5% = 35,000 ad valorem tariff. Of specific tariff would be; 2 x 16 = 32. Therefore, a total tariff tax of 35,032 euros would be paid.