you should delete count="CHAPTER"
in xsl:number
. Try this stylesheet
<xsl:stylesheet version="1.0"
xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
xmlns:fo="http://www.w3.org/1999/XSL/Format">
<xsl:output indent="yes"/>
<xsl:strip-space elements="*"/>
<xsl:template match="/">
<fo:bookmark-tree>
<fo:bookmark internal-destination="TOC"
starting-state="show">
<xsl:apply-templates select="xml/chapter"/>
</fo:bookmark>
</fo:bookmark-tree>
</xsl:template>
<xsl:template match="chapter">
<fo:bookmark internal-destination="CHAPTER/LONG-NAME"
starting-state="show">
<fo:bookmark-title>
<xsl:number format="1.1 " level="multiple" />
<xsl:value-of select="long-name" />
</fo:bookmark-title>
<xsl:apply-templates/>
</fo:bookmark>
</xsl:template>
<xsl:template match="long-name"/>
</xsl:stylesheet>
it outputs:
<?xml version="1.0" encoding="utf-8"?>
<fo:bookmark-tree xmlns:fo="http://www.w3.org/1999/XSL/Format">
<fo:bookmark internal-destination="TOC" starting-state="show">
<fo:bookmark internal-destination="CHAPTER/LONG-NAME" starting-state="show">
<fo:bookmark-title>1 Chapter 1</fo:bookmark-title>
<fo:bookmark internal-destination="CHAPTER/LONG-NAME" starting-state="show">
<fo:bookmark-title>1.1 Chapter A</fo:bookmark-title>
<fo:bookmark internal-destination="CHAPTER/LONG-NAME" starting-state="show">
<fo:bookmark-title>1.1.1 Chapter B</fo:bookmark-title>
</fo:bookmark>
</fo:bookmark>
<fo:bookmark internal-destination="CHAPTER/LONG-NAME" starting-state="show">
<fo:bookmark-title>1.2 Chapter C</fo:bookmark-title>
</fo:bookmark>
</fo:bookmark>
<fo:bookmark internal-destination="CHAPTER/LONG-NAME" starting-state="show">
<fo:bookmark-title>2 Chapter 2</fo:bookmark-title>
<fo:bookmark internal-destination="CHAPTER/LONG-NAME" starting-state="show">
<fo:bookmark-title>2.1 Chapter D</fo:bookmark-title>
</fo:bookmark>
<fo:bookmark internal-destination="CHAPTER/LONG-NAME" starting-state="show">
<fo:bookmark-title>2.2 Chapter E</fo:bookmark-title>
</fo:bookmark>
</fo:bookmark>
</fo:bookmark>
</fo:bookmark-tree>