Jakarta. Facebook has received an in-principle approval to set up a domestic unit in Indonesia, said a senior government source, home to the social networking giant's fourth-largest user base.
Indonesia has been pushing multinational technology firms to be locally incorporated, arguing that companies such as Alphabet's Google set up small business entities to provide "auxiliary" services and get away with minimal taxation, while booking most of their revenue from the country elsewhere.
In fact, Google has been locked in a months-long dispute over allegations by the government that the search giant had not made enough annual payments. The outcome of this is expected to indicate how the government may pursue others, such as Facebook and Twitter, for taxes.
Facebook is now in the process of establishing a local unit in the country, said the senior government source, who has direct knowledge of the matter but declined to be identified as the information was not public. The social media giant currently operates in Indonesia through an office in Central Jakarta.
The Southeast Asian country had 69 million monthly active Facebook users as of the first quarter of 2014, placing the country fourth globally after the United States, India and Brazil, according to data from the company.
Facebook did not respond to requests for comment and has not provided an update on the number of its users in Indonesia.
The office that Facebook opened in Indonesia three years ago allows it to work with advertisers as well as small and medium businesses "that need an education on how to market their products," a Facebook executive told local media at the time.
But according to an official at Indonesia's communications ministry, "Facebook only appoints people in Jakarta when the need arises, no more than that. Whether they have a permanent office here or not, we don't even know."
The country 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 week, the communications minister said Google's Asia Pacific headquarters had agreed on future tax payments in Indonesia. But he declined to comment on whether they had resolved their dispute over taxes for past years.
It was also unclear if Google would set up a domestic unit that is separate from its existing local entity, PT Google Indonesia, which tax officials allege simply acts as a sales service provider.
Indonesia's tax office estimates the total advertising revenue for the industry in the country at around $830 million, with Google and Facebook accounting for around 70 percent.
However, Google has 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.
Additional reporting by Cindy Silviana, Hidayat Setiaji and Jakarta Newsroom