The syntax is:
Code:
<navPoint> (Level 1)
</navPoint>
<navPoint> (Level 1)
<navPoint> (Level 2)
</navPoint>
<navPoint> (Level 2)
</navPoint>
</navPoint>
i.e. Just include the <navPoint>'s of the inner levels inside the parent <navPoint>. Whether or not iBooks will display this in tree form is unknown to me.