Ad valorem is a Latin phrase meaning “according to value.” An ad valorem duty is a levy that operates in contrast to the operation of a specific duty. A specific duty is levied at a fixed sum based upon the quantity of an item. An ad valorem duty is levied based upon the value of the item.
Ad Valorem Duty vs. Ad Valorem Tax and Property Ad Valorem
An ad valorem duty is a levy by a customs authority on certain imports. Agencies that import goods into a nation may have to pay an ad valorem duty on imported items based on the total market value of the items being sold.
An ad valorem duty must not be confused with an ad valorem tax or an ad valorem pertaining to real estate. An ad valorem tax is a levy by a nation, state, province or municipality against a salable item at certain percentage of the good's price. An example of an ad valorem tax is a national or state sales tax. Value-added taxes are also another example of an ad valorem tax based upon value of an item's exchange. An ad valorem pertaining to real estate is a value ascribed to a property (movable, personal and land) by a property assessor or tax assessor. A property or millage tax is an example of an ad valorem tax pertaining to real estate.
Ad Valorem Duty Advantages and Disadvantages
An ad valorem duty is functional for its flexibility, allowing an item to be levied at a price based upon its changing value. Ad valorem duties are particularly useful when the price of an imported item has elevated. When the price of an item is high, a customs authority will earn a considerable percentage off the item’s sale. Consequently, when a certain item has lost value, a customs authority will assume a loss in percentage earning on an ad valorem duty. Under-invoicing—understating the price of an item—may be utilized in order to avoid an ad valorem duty.
Ad Valorem Duty vs. Specific Duty
Assessing the actual value of an item can be complex, leading a customs authority to rely on a specific duty instead. A specific duty may seem advantageous in comparison to an ad valorem duty because it offers a stable percentage earning off an item, despite an item’s actual or perceived value. However, the use of specific duty in a tariff system can lead to the value manipulation of a low-priced item, unlike a tariff system utilizing an ad valorem duty.