What is ‘Ad Valorem’ rate of duty?

When goods are imported into a nation from another, there
is usually a tariff associated with the transaction which is called import
duty.

The amount of import duty that has to be paid when a
good is imported can be calculated in many ways. These include the number of items being
imported, the weight of the goods being imported, or the duty could be a fixed amount
for each transaction.

The most common way of calculating
import duty is using an "Ad Valorem" rate of duty. Ad Valorem means "according to value"
in Latin. If an ad valorem rate of duty is being applied, the actual duty required to be
paid is dependent on the cost of the item being imported. Importing an item which has a
higher price would incur a higher import duty than importing one which has a lower
cost.

For example, if the ad valorem rate of duty for toys
is 20%, importing a toy worth $100 would require a payment of $20 as import duty whereas
importing a toy worth $500 would require the payment of $100 as import
duty.