If that's above the shower head, technically, it's considered a dry area, and doesn't need to be made water resistant and just a good coat of paint is usually enough. But, typically, the shower enclosure would be attached to the studs, and the drywall would come down over that flange. If the wall isn't shimmed out, or the stud notched, that can cause the drywall to bow out.
You could tile the area from there to the top of the wall, but to get the thinset to stick, you'd probably want to scrape any loose paint off and rough up the paint with some sand paper. That's usually enough, but various companies make a primer designed to go underneath tile (Mapei Eco Prim Grip is one) that helps seal the surface and makes a good bond to thinset. As long as the tile is more than 1/2 supported on the wall, it can overhang the flange. You want to keep the tile a slight distance above the horizontal surface, and caulk that as there will be movement between the two, and you can't use anything rigid like thinset or grout, at least that's the industry standard.
The do make 1/4 and 3/8" thick drywall, and you may be able to put a small strip in there then smooth things over (I'd use a drywall compound you have to mix with water versus the stuff in a bucket, as that won't soften if it gets wetted again after it sets) and paint (a good latex paint is normally enough), or cut out a bit more of the drywall and put in a wider strip of something like KerdiBoard, which you could make a rabbit joint on the back to go over the flange of the surround. I would consider that if I were going to tile the surface, but it would also accept paint. Kerdiboard is a foam sheet with tileable membranes on each side. If any moisture did get on the top of the surround, it wouldn't wick anything, or get soft. A moisture resistant drywall is mostly a joke, so don't bother.