Indonesia plans to pursue Google for five years of back taxes — a bill of more than $400 million for 2015 alone.
The tax office believes that PT Google Indonesia paid less than 0.1 percent of the total income and value-added taxes it owed last year.
A senior finance ministry official said on Thursday that Indonesia's tax office will investigate Google for suspected unpaid taxes from billions of dollars worth of advertising revenue.
Muhammad Hanif, head of the specials cases branch in the tax office, said Google's refusal to cooperate after it was sent a letter in April requesting to be allowed to examine the company's tax reports had raised suspicions.
He told a news conference that the probe would not be launched until the end of the month at the earliest.
PT Google Indonesia, incorporated in 2011, said it was complying with the government.
"We continue to cooperate fully with local authorities and pay all applicable taxes," a Google Indonesia spokesman said in an emailed response to questions.
The government had also asked to examine the tax reports of the Indonesian offices of three other U.S. Internet based companies - Yahoo, Twitter and Facebook.
Those three companies have complied, officials said.
Yahoo and Google have formed Indonesian limited liability companies, while Twitter and Facebook operate branches of their Asia-Pacific offices in Indonesia.
The government believes these companies owe income and value added tax on billions of dollars of revenue they generate from advertising in Indonesia, the tax office said.
Hanif said Google's Indonesian entity was only allocated around 4 percent of the total revenues generated from the country, and it was this amount that was taxed, which he described as too small and "unfair".
The communications ministry had estimated the value of digital advertising in Indonesia at about $800 million last year. The ministry said all of it was untaxed.
There was no immediate explanation for the wide discrepancy of the two agencies' estimates for digital advertising revenue.
Indonesia is facing a sizeable revenue shortfall this year as the resource-rich country can no longer rely on commodity-related income.