Ethiopia, like the rest of the world, in an effort to protect its tax base, has enacted a transferrnpricing directive requiring, among other things, that inter-company transactions be conductedrnat armâ€™s length price & to direct and adjust profits in cases where transactions between relatedrnpersons differed from those between unrelated persons as well as to provide a legal basis forrnAdvance Pricing Agreement to be entered into between a taxpayer and the tax collecting organ.rnHowever, due to the very nature of TP transactions, lack of comparable data and lack ofrnadministrative capacity, the determination of the correct armâ€™s length price has remained arnmajor challenge in Ethiopia, not only for the taxpayers, but for the tax authority as well.rnThe main objective of this paper is to provide an overview of the newly adopted transfer pricingrndirective as well as the legal and institutional framework for TP Administration in Ethiopiarnand to analyze the practical application of transfer pricing rule on MNEs. So, the paperrncommences by briefly discussing the salient features of Transfer pricing of MNEs in generalrnand Ethiopian TP Directive in particular. The paper then devoted to examine the practicalrnapplication of transfer pricing rule on MNEs and analysis its consistence with the directives.rnIn addition, the paper critically evaluates the existing institutional framework for thernimplementation of transfer pricing regulations.rnThe key findings made includes the fact that the actual implementation of the directive is farrnfrom realization due to different factors such as lack of administrative capacity to conductrneffective and efficient audit; lack of well-equipped and qualified experts; lack of sufficient andrnreliable comparable data; lack of advanced communication technology and informationrnexchange mechanisms as well as lack of effective organizational structures and etc. The paperrnalso highlights some issues that need to be strengthen and future challenges in implementingrnthe regulations. Some recommendations are also provided at the end of the paper to the taxrnauthority and policy makers to enhance and improve the administration of TP on MNEsrnIn conclusion, the study establishes that the current legal and institutional framework forrntransfer pricing in Ethiopia is far from practical application, inadequate and in need ofrnreforms. In this regard, recommendations are made for strengthening the legal, policy andrninstitutional framework for TP in Ethiopian in line with developing countries best practices.