In the inspector for a given tag (which you can get to by going to Tags -> selecting the tag you want to edit -> tapping on the tag heading), there’s an icon in the lower left that shows a circle with an arrow pointing into another circle. That’ll give you the option to move the tag into another tag.
it works the way @deaghean describer, but you can also just drag and drop tasks into the hierarchy you want. (although drag and drop is hit-and-miss in OF on iOS)