South Korea needs to redefine what constitutes close family relations in its basic tax code law to reflect realistic social and economic conditions, a think tank belonging to an association of conglomerates insisted Monday.

According to the Korea Economic Research Institute, the research arm of the Federation of Korean Industries, South Korea maintains outdated taxation rules that define close blood and in-law relatives based on revisions made in 1974. It said such rules do not reflect the way people define relatives in the 21st century and conduct economic transactions.

The boundary of familial relations is important for conglomerates, which face stiffer taxes on business transactions that are conducted between people that by law are in "special relations." The law is meant to prevent unfair trading or tax evasion by using family members.

At present, the country's tax codes define close family as direct ancestors, parents, spouses, siblings and up to second cousins who share the same great grandparents. It also includes first cousins by marriage.

KERI, however, claimed such designations conflict with current social norms.

Polls conducted in the past few years showed people thought close relatives should only include first cousins who share grandparents and up to aunts and uncles through marriage.

The outdated definitions, moreover, complicates ordinary transactions that effectively take place without consideration of family ties.

"Realistically, people don't have preferential business deals with second cousins and beyond," the report said.

The research institute also pointed out that South Korea's definition of relatives are more extended than in other countries like the United States, Japan and Canada.

"In the U.S. the tax office views special relations as brothers and sisters, spouses, parents and direct lineal descendants, while in Canada close relatives only encompass first cousins," the report said. It said in the case of Japan, only aunts and uncles of the spouse are viewed as close relatives.

KERI said that to get rid of unnecessary red tape and not penalize "distant" relatives who conduct regular transactions, Seoul should seriously consider reducing the scope of what constitutes close relations. (Yonhap News)