Ad Valorem Taxes and the Right Management

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Ad valorem tax is a type of direct or indirect tax in which the tax rate is determined on the basis of the value of the taxable goods and most often it is expressed as a share (percentage) of it. The name of the category comes from the Latin ad valorem, which means “based on value”. Ad valorem taxes can be both central (valid for all in a country) and local (imposed by one municipality) and both indirect (when they are in the form of excise duty) and direct (as is the case with property tax). In this case the use of the income tax calculator comes up useful. For finding out the best understanding for the taxes this is important.

The Right Processes

The taxation of a wide range of goods, products and services can take the form of an ad valorem tax. This is the case for many types of excise duties, property taxes or other goods. Perhaps the most popular representative of ad valorem taxes is value added tax (VAT), where the tax base is the value of the exchanged goods or services on which the tax rate of 20% (as of 2019) is charged, through which determines the final price of the transaction, if no other taxes are due. In the case of Bulgaria, almost a quarter of all taxes collected in the treasury come from VAT.

Example of how the ad valorem tax on real estate in Sofia is calculated:

According to the regulation in force as of 2019, this type of taxation has a rate of 1,875 ‰ from the tax assessment of property. If it is $ 100 thousand, then the annual real estate tax owed by the owner of this dwelling, if we exclude from the equation the other due fees and taxes, amounts to:

  • 100,000 x 0.001875 = $ 187.5

Thus, by simply multiplying by the price of the product, the amount of VAT on it can be determined, etc.

Conclusion

Almost all excise goods are also subject to an ad valorem tax or have an ad valorem component of the tax rate, and therefore fiscal policy aimed at this category of taxes is particularly important for each country. In addition, the management of the ad valorem and specific (if any) component of excise duty on certain goods can be used as a lever to direct consumers to or discourage the consumption of a particular segment of a particular good. This is observed in cigarettes, for example, which are taxed at both rates and in which changes in their relative weight can create a relative rise or fall in the price of more expensive imported cigarettes or slightly cheaper Bulgarian ones.

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