By Cindy Silviana and Eveline Danubrata
JAKARTA (Reuters) - Alphabet Inc's (O:GOOGL) Google Asia Pacific headquarters has agreed on future tax payments in Indonesia, the communications minister said, paving the way for a shake up in how technology firms operate in Southeast Asia's biggest economy.
Google has been locked in a months-long dispute over allegations by Indonesia's government that the search giant had not made enough annual payments.
Finance Minister Sri Mulyani Indrawati said on Tuesday that Indonesia had now reached a tax deal with Google for 2016. She declined to disclose the settlement sum.
The search giant's dispute with Indonesia has been seen as a bellwether of how the government of the country with the world's fourth-largest population may pursue other technology companies such as Facebook Inc (O:FB) and Twitter Inc (N:TWTR) for taxes.
"On the solution for future taxes, they (Google Asia Pacific) have agreed with the government," said Rudiantara, Indonesian Minister of Communications and Information, who has oversight on internet-based companies operating in the country.
This may be subject to a change in Indonesia's regulation for the advertising business, which has been proposed by the communications ministry, said Rudiantara, who goes by one name.
The ministry will work with Indonesia's investment coordinating board on the regulation, he added.
Rudiantara declined to comment on whether Google had reached an agreement with Indonesia on its taxes for previous years.
Indonesian tax officials have alleged that most of Google's revenue generated in the country is booked at its Asia Pacific headquarters in Singapore and its local entity, PT Google Indonesia, simply acts as a sales service provider.
Under a new agreement, Google's Indonesian entity will receive the revenue and pay expenses for its business in the country, said a senior government source, who declined to be identified as the information was not public.
It is unclear if Google will set up a new domestic unit that is separate from PT Google Indonesia.
Google did not respond to requests for comment. A spokesman for Indonesia's tax office declined to comment.
SMALLER THAN MOOTED
A senior tax official had said in September that Indonesia planned to pursue Google for five years of back taxes and the company could face a bill of more than $400 million for 2015 alone if it were found to have avoided payments.
Indonesian tax officials had estimated that the total advertising revenue for the industry in Indonesia was around $830 million, with Google and Facebook accounting for around 70 percent of that.
But Google had pointed to a joint study by the firm and Singapore state investor Temasek that estimated the size of Indonesia's digital advertising market at $300 million for 2015.
The overall tax settlement amount will reflect the fact that Google's Indonesia revenues are "much smaller than the bombastic figures that Ministry of Finance officials have been mooting", the senior government source said.
Indonesia is eager to ramp up tax collection to narrow its budget deficit and fund an ambitious infrastructure program. Other governments around the world are also seeking to clamp down on what they see as corporate tax avoidance.
Last year, Google agreed to pay 130 million pounds ($165.7 million) in back taxes to settle a probe by Britain's tax authority, while Thailand is studying plans to toughen tax collection rules for internet and technology firms.
($1 = 0.7846 pounds)