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I am trying to create a difference layer from an overlay layer and a base layer. The base layer (colored orange in the image below) has a larger extent than the overlay layer (light brown) when zoomed out, but I want it to have the same extent with the overlay layer:

polygon extent

I could manually create a new base layer by drawing a rectangle or square over the overlay layer, but I prefer the exact extent of the overlay layer.

How can I create a new layer containing a polygon that shows the extent of the overlay layer?

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You should find what you want there :

Processing toolbox / QGIS geoalgorithms / Vector general tools / Polygon from layer extent
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  • The toolbox name has changed to Create layer from extent for QGIS 3.6 and ahead Commented Jun 22, 2022 at 9:19

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