diff --git a/packages/playwright/src/third_party/tsconfig-loader.ts b/packages/playwright/src/third_party/tsconfig-loader.ts
index d14b7602b0..d85ff32100 100644
--- a/packages/playwright/src/third_party/tsconfig-loader.ts
+++ b/packages/playwright/src/third_party/tsconfig-loader.ts
@@ -44,8 +44,11 @@ interface TsConfig {
 
 export interface LoadedTsConfig {
   tsConfigPath: string;
-  baseUrl?: string;
-  paths?: { [key: string]: Array<string> };
+  paths?: {
+    mapping: { [key: string]: Array<string> };
+    pathsBasePath: string;  // absolute path
+  };
+  absoluteBaseUrl?: string;
   allowJs?: boolean;
 }
 
@@ -132,25 +135,27 @@ function loadTsConfig(
   for (const extendedConfig of extendsArray) {
     const extendedConfigPath = resolveConfigFile(configFilePath, extendedConfig);
     const base = loadTsConfig(extendedConfigPath, references, visited);
-
-    // baseUrl should be interpreted as relative to the base tsconfig,
-    // but we need to update it so it is relative to the original tsconfig being loaded
-    if (base.baseUrl && base.baseUrl) {
-      const extendsDir = path.dirname(extendedConfig);
-      base.baseUrl = path.join(extendsDir, base.baseUrl);
-    }
     // Retain result instance, so that caching works.
     Object.assign(result, base, { tsConfigPath: configFilePath });
   }
 
-  const loadedConfig = Object.fromEntries(Object.entries({
-    baseUrl: parsedConfig.compilerOptions?.baseUrl,
-    paths: parsedConfig.compilerOptions?.paths,
-    allowJs: parsedConfig?.compilerOptions?.allowJs,
-  }).filter(([, value]) => value !== undefined));
-
-  // Retain result instance, so that caching works.
-  Object.assign(result, loadedConfig);
+  if (parsedConfig.compilerOptions?.allowJs !== undefined)
+    result.allowJs = parsedConfig.compilerOptions.allowJs;
+  if (parsedConfig.compilerOptions?.paths !== undefined) {
+    // We must store pathsBasePath from the config that defines "paths" and later resolve
+    // based on this absolute path, when no "baseUrl" is specified. See tsc for reference:
+    // https://github.com/microsoft/TypeScript/blob/353ccb7688351ae33ccf6e0acb913aa30621eaf4/src/compiler/commandLineParser.ts#L3129
+    // https://github.com/microsoft/TypeScript/blob/353ccb7688351ae33ccf6e0acb913aa30621eaf4/src/compiler/moduleSpecifiers.ts#L510
+    result.paths = {
+      mapping: parsedConfig.compilerOptions.paths,
+      pathsBasePath: path.dirname(configFilePath),
+    };
+  }
+  if (parsedConfig.compilerOptions?.baseUrl !== undefined) {
+    // Follow tsc and resolve all relative file paths in the config right away.
+    // This way it is safe to inherit paths between the configs.
+    result.absoluteBaseUrl = path.resolve(path.dirname(configFilePath), parsedConfig.compilerOptions.baseUrl);
+  }
 
   for (const ref of parsedConfig.references || [])
     references.push(loadTsConfig(resolveConfigFile(configFilePath, ref.path), references, visited));
diff --git a/packages/playwright/src/transform/transform.ts b/packages/playwright/src/transform/transform.ts
index 82b5acdda1..a2e376d043 100644
--- a/packages/playwright/src/transform/transform.ts
+++ b/packages/playwright/src/transform/transform.ts
@@ -30,7 +30,7 @@ import { getFromCompilationCache, currentFileDepsCollector, belongsToNodeModules
 const version = require('../../package.json').version;
 
 type ParsedTsConfigData = {
-  absoluteBaseUrl: string;
+  pathsBase?: string;
   paths: { key: string, values: string[] }[];
   allowJs: boolean;
 };
@@ -58,16 +58,15 @@ export function transformConfig(): TransformConfig {
 }
 
 function validateTsConfig(tsconfig: LoadedTsConfig): ParsedTsConfigData {
-  // Make 'baseUrl' absolute, because it is relative to the tsconfig.json, not to cwd.
   // When no explicit baseUrl is set, resolve paths relative to the tsconfig file.
   // See https://www.typescriptlang.org/tsconfig#paths
-  const absoluteBaseUrl = path.resolve(path.dirname(tsconfig.tsConfigPath), tsconfig.baseUrl ?? '.');
+  const pathsBase = tsconfig.absoluteBaseUrl ?? tsconfig.paths?.pathsBasePath;
   // Only add the catch-all mapping when baseUrl is specified
-  const pathsFallback = tsconfig.baseUrl ? [{ key: '*', values: ['*'] }] : [];
+  const pathsFallback = tsconfig.absoluteBaseUrl ? [{ key: '*', values: ['*'] }] : [];
   return {
     allowJs: !!tsconfig.allowJs,
-    absoluteBaseUrl,
-    paths: Object.entries(tsconfig.paths || {}).map(([key, values]) => ({ key, values })).concat(pathsFallback)
+    pathsBase,
+    paths: Object.entries(tsconfig.paths?.mapping || {}).map(([key, values]) => ({ key, values })).concat(pathsFallback)
   };
 }
 
@@ -132,7 +131,7 @@ export function resolveHook(filename: string, specifier: string): string | undef
         let candidate = value;
         if (value.includes('*'))
           candidate = candidate.replace('*', matchedPartOfSpecifier);
-        candidate = path.resolve(tsconfig.absoluteBaseUrl, candidate);
+        candidate = path.resolve(tsconfig.pathsBase!, candidate);
         const existing = resolveImportSpecifierExtension(candidate);
         if (existing) {
           longestPrefixLength = keyPrefix.length;
diff --git a/tests/playwright-test/resolver.spec.ts b/tests/playwright-test/resolver.spec.ts
index 778efefe1f..4092263648 100644
--- a/tests/playwright-test/resolver.spec.ts
+++ b/tests/playwright-test/resolver.spec.ts
@@ -505,6 +505,9 @@ test('should support extends in tsconfig.json', async ({ runInlineTest }) => {
     }`,
     'tsconfig.base1.json': `{
       "extends": "./tsconfig.base.json",
+      "compilerOptions": {
+        "allowJs": true,
+      },
     }`,
     'tsconfig.base2.json': `{
       "compilerOptions": {
@@ -518,7 +521,9 @@ test('should support extends in tsconfig.json', async ({ runInlineTest }) => {
         },
       },
     }`,
-    'a.test.ts': `
+    'a.test.js': `
+      // This js file is affected by tsconfig because allowJs is inherited.
+      // Next line resolve to the final baseUrl ("dir") + relative path mapping ("./foo/bar/util/*").
       const { foo } = require('util/file');
       import { test, expect } from '@playwright/test';
       test('test', ({}, testInfo) => {
@@ -534,6 +539,36 @@ test('should support extends in tsconfig.json', async ({ runInlineTest }) => {
   expect(result.exitCode).toBe(0);
 });
 
+test('should resolve paths relative to the originating config when extending and no baseUrl', async ({ runInlineTest }) => {
+  const result = await runInlineTest({
+    'tsconfig.json': `{
+      "extends": ["./dir/tsconfig.base.json"],
+    }`,
+    'dir/tsconfig.base.json': `{
+      "compilerOptions": {
+        "paths": {
+          "~/*": ["../mapped/*"],
+        },
+      },
+    }`,
+    'a.test.ts': `
+      // This resolves relative to the base tsconfig that defined path mapping,
+      // because there is no baseUrl in the final tsconfig.
+      const { foo } = require('~/file');
+      import { test, expect } from '@playwright/test';
+      test('test', ({}, testInfo) => {
+        expect(foo).toBe('foo');
+      });
+    `,
+    'mapped/file.ts': `
+      module.exports = { foo: 'foo' };
+    `,
+  });
+
+  expect(result.passed).toBe(1);
+  expect(result.exitCode).toBe(0);
+});
+
 test('should import packages with non-index main script through path resolver', async ({ runInlineTest }) => {
   const result = await runInlineTest({
     'app/pkg/main.ts': `